The US stocks have been rising for the past few months, but this may not last long.

Tom DeMark, a well-known trader on Wall Street, is a highly respected market strategist.Technical analysisHe has provided advice to investors such as Paul Tudor Jones, Leon Cooperman, and Steven A. Cohen. He stated that the market may be about to see a top reversal.

DeMark focuses on timing market trend exhaustion and is the creator of the stock market turning point indicators. His creed is that the market peaks on good news and bottoms on bad news.

DeMark's trading system includes hundreds of indicators, the most widely used being the TD sequence. This indicator employs a price comparison process that includes both 'preparation' and 'countdown' components, and is used to identify potential turning points in market trends or consolidation processes. The application method can be seen in Figure 1.

Another part of the TD countdown consists of 13 trading time periods, starting to count down from the 9th day of the buy preparation, requiring that the closing price on that day is lower than or equal to the lowest price two days prior. These 13 days do not need to occur consecutively, and the application method can be seen in Figure 2.

In an email to MarketWatch, DeMark stated that the Dow Jones rose 624% from its low in December 1914 to its high in September 1929, and rose 587% from the low in 2009 to the high this week. He noted that the daily, weekly, and monthly price movements of the Dow are similar to historical patterns.

According to his analysis, the upward target for the Dow in an optimistic scenario is 47,045.

He also compared the condition of the Dow with a recent rebound. He said that the months of gains starting at the end of 2022 have similar upward projections to the rally from 2020 to early 2022.

As for the s&p 500 index, he noted that the monthly model countdown of the TD sequence is at 12 or 13, and indicated that the upward target for reference is 6,118 points.

DeMark also mentioned that on the daily chart, the TD countdown of the Dow is at 11, and the s&p 500 index is also at 11, so essentially two new historical highs are needed to trigger a sell. This could lead to a standard pullback of 5% to 10%, or what he referred to as a complete collapse.

"The gains over the past two weeks have been very unstable, and a sudden pause in buying — even without selling pressure — could weaken those gains and turn it into a seller's market. Admittedly, good news is unlikely to continue until Trump's inauguration, but once buying interest is interrupted at any time, the subsequent rebound should be brief," DeMark said.

Additionally, he is also cautious about nvidia, the key chipmaker driving the AI revolution, which will announce its earnings this week.

He pointed out that the TD countdown for nvidia's stock price is currently at 12, and a new closing high would complete its rebound. He said that the stock's potential upward target is $154.50, while the downside risk "could be substantial."

Bank of America: Three risks that could disrupt the "Trump rally".

In fact, from a fundamental perspective, the usa stock market may also have overestimated the bullish impact brought by Trump 2.0, thus facing the risk of a top reversal.

Since Trump's victory in the presidential election, the stock market has been on a vigorous upward trend. One of the main driving forces is the strong expectation of future profit growth, which is seen as a direct bullish impact of Trump's plan to lower corporate tax rates and ease regulations.

Although bank of america's year-end target for the s&p 500 index is slightly above the current level, the firm's stock strategy team has outlined three developments in new research that could disrupt the current "eps rising cycle" driving the stock market's rise.

First, an economic recession could severely weaken profit growth, resulting in a 10% to 20% drop in the s&p 500 index's eps.

Although an economic recession is not bank of america's baseline scenario, the bank has stated that under the leadership of soon-to-be President Trump, the risk of an economic recession is real.

Analysts noted in another report that it will depend on which policies the Trump administration prioritizes. If Trump pushes for large-scale immigration restrictions and protectionist trade policies under minimal fiscal easing, the economy will fall into recession.

In a recession, it is typical for profits to decrease by 20% from peak to trough. In this case, the s&p 500 index's eps will drop to $195-$220 next year.

It is certain that if the elected president no longer emphasizes trade and immigration restrictions, but instead supports tax cuts and deregulation, bank of america will also see opportunities for explosive economic growth. In this case, GDP growth in 2025 could even exceed 3%.

Secondly, if Trump's trade plan is implemented, retaliatory tariffs could inflict a 10% hit on the eps of the s&p 500 index.

During the campaign, the elected president promised to impose a 10% tariff on all foreign goods imported into the usa and a 60% tariff on imports from china.

If Trump keeps his promises, bank of america expects that as other parts of the world establish their own retaliatory tariffs, usa's overseas sales will face a 3% to 4% hit.

The bank stated that in the intensifying trade war, industrial and semiconductor stocks will face the greatest risks.

Thirdly, a significant rise in bonds yields may lead to another 10% decline in eps.

In bank of america's most pessimistic outlook, the yield on 10-year us treasury bonds soars to 7%. This could happen if Trump's tariffs and immigration restrictions trigger inflation shocks.

If this happens, the surge in us treasury yields indicates that the manufacturing purchasing managers' index (PMI) will reach 43 by the end of 2024.

The index monitors the health of the manufacturing sector in the usa, with a reading below 50 indicating a contraction in manufacturing activity. As of October, the manufacturing PMI in the usa is 46.5.

The bank of america notes that once the 10-year usa bond yield rises above 5%, the stock market may face greater pressure.

Since trump's election victory, usa bond yields have been climbing as investors worry about the increasing uncertainty of the federal reserve continuing interest rate cuts during trump's second term.

Editor/rice