As we kick off 2025, it’s important to reflect on the lessons learned from the past year. The market’s performance in 2024 was undeniably strong — with the S&P 500 gaining over 23%, the Nasdaq climbing 29%, and the Dow up 13% — but these impressive numbers also come with a reality check.
Last year marked the tail end of a relentless bull run, with the market surging over 70% from the lows of late 2022 to its recent highs. While the gains were exhilarating, they’ve pushed valuations into overextended territory.
Price-to-earnings ratios, price-to-sales metrics, and other valuation measures are sitting at levels we’ve historically only seen during precarious times, such as just before major corrections.
Does this mean a crash is imminent? Not necessarily…
Markets rarely go from a strong bull phase directly into a steep bear market. Instead, we’re more likely to see a transitional phase — consolidation, sideways action and perhaps a much-needed correction to realign valuations with economic reality.
When reflecting on 2024, one thing stands out: Sentiment swings were massive.
The rally was fueled by optimism surrounding key drivers like AI and the Technology sector (XLK). However, the market also showed vulnerability, with sharp pullbacks whenever the Federal Reserve reminded us that inflation is still a concern.
These swings highlight the psychology driving the market — fear and greed — which are always in play, but often amplified during periods of uncertainty.
Looking ahead, 2025 could bring more of the same, with a few twists…
Corrections in the range of 5–10% wouldn’t surprise me and might even be welcomed. Such moves could shake out weak hands, stabilize valuations and set the stage for another leg higher.
However, there’s also the potential for extended consolidation, where the market grinds sideways for months as it digests the massive gains from 2023 and 2024.
How I’m Hedging
To navigate this environment, I’ve emphasized the importance of protection. This isn’t a time to blindly chase the highs — it’s a time to have a game plan for both up- and downside scenarios.
That’s why I’ve been focused on tools like collar trades, which let me generate income while also limiting risk. I don’t have to predict the future — I just need to stay disciplined and actively manage my positions.
A collar trade is one of the best tools to manage risk in a portfolio while maintaining some upside potential. Here’s how it works…
You own shares of a stock and want to protect your downside without spending a fortune on a straight put option. To set up a collar, you buy a protective put below the current stock price and sell a call above it.
The income from selling the call helps offset the cost of the put — sometimes entirely, resulting in what’s essentially a free hedge.
For example, if you own a stock trading at $100, you could buy a $90 put to limit your losses below that level and sell a $110 call to cap your upside. If the stock stays between $90 and $110, you hold onto your shares while pocketing the premium from the call sale.
If the stock drops below $90, the put protects you. If it rises above $110, your shares are called away, locking in profits. This strategy is perfect for traders like me who prioritize downside protection while staying active in the markets.
The bottom line?
One thing is certain: After two incredible years, it’s time to exercise caution.
Whether the market gives us a breather, a correction or a new rally, the key is to stay prepared, protect what you’ve built, and seize opportunities as they come.
I’ll see you in the markets.
Chris Pulver
Chris Pulver Trading
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
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