A Roulette Wheel Has Taken Over S&P 500 Stocks. Here’s How Not to Lose Your House.

For the past five years, the S&P 500 Index ($SPX) has either been risk on or risk off, with not much time spent in between extremes. 

As I see it, investing has become more akin to gambling. That’s made the SPDR S&P 500 Trust (SPY) lot more like a roulette wheel that tends to have runs of consecutive patterns coming up. So most trends are more than one or two in a row.

Here’s what I mean:

• When it rises, that’s like a black number coming up
• When it falls, that’s like a red number coming up
• When it is neutral, the green numbers (0 and 00) come up

As we can see in that single chart below, it has been five years of runs. Mostly “black” in the code noted above. 

Here’s what I see: a giant, rarely interrupted run from $350 to $600, a pullback due to the 2025 tariff situation, and then a $480 to $750 monster run. That’s $520 points of SPY gains right there. 

How much did SPY rise during the past five years? Around $350 a share. So it took two uncanny, unlikely runs of “black” at the roulette table to produce around 150% of SPY’s total return over that half-decade. That covered around three years of the five. So for about 40% of the time, the stock market was falling or stalled.

Why Does SPY’s Recent Trading Pattern Matter?

If you look at the long-term history of SPY, well beyond this time frame, it presents as a comforting, upward-sloping line. Wall Street loves this visual because it sells the foundational narrative: “Just buy, hold, and relax — compounding will smoothly take care of the rest.” 

However, anyone who has managed real money through full market cycles knows that such a smooth line is an optical illusion. And the reason to highlight here, in one picture only, is that the current environment is hinting at a sustained run of red.

The stock market does not ascend in an orderly, 8%-10% annual incline. Instead, SPY’s gains are concentrated into remarkably compressed timeframes. Months — and sometimes an entire year’s worth of market progress — happen in a matter of a few explosive weeks or days. And we’ve just had one of the best runs of black on the wheel in recorded history. 

That means what could happen next is something investors may not be prepared for. 

The Anatomy of the Compression

I know, I know, we’ve all heard that thing about how if you miss just the 10 best trading days of a decade, your total cumulative returns are typically cut in half. The market’s upside progress is inherently sprint-based. It occurs during brief, violent bursts of momentum, often triggered by sudden shifts in Federal Reserve policy, massive liquidity injections, or short-squeeze panics.

Once that initial sprint exhausts itself, the market enters the “chop zone.” Bulls buy the dip expecting an immediate encore, while bears short the overextended valuations. The result is a prolonged tug of war where the index swings back and forth, generating massive noise, high intraday volatility, and virtually zero net directional progress for months on end.

Or, it gets really ugly. When liquidity becomes harder to get, and margin calls are being made by brokerages to their financially strung-out customers, it can cascade lower, and leave people years behind. This is when we really need to remember that we are all investing for SOMETHING. Not simply for the thrill of the trade.

Modern markets are dominated by automated quantitative models, target-date funds, and passive indexing flows. When a macro green light hits the tape, algorithmic buying hits all 500 stocks simultaneously, driving the index straight up in a compressed window.

However, once that initial flood of cash is deployed, the index hits a hard fundamental and/or technical ceiling. We may be in the process of that occurring right now, on both counts. 

Thinking Like a Trader (Without Becoming One)

Recognizing this risk on/risk off rhythm doesn’t mean you should quit your job, sit in front of one minute-charts (as I’ve been known to do), and day-trade SPY options. 

However, it does require you to adopt a trader’s mindset toward risk management, even as a long-term allocator. A few things to keep front of mind: First, when SPY halts after a parabolic run, stop expecting continuous daily gains. Accept that the market has entered a different phase, and refrain from chasing late-stage breakouts near the top of the trading range.

And, start to treat rebalancing as an active investing tool at your disposal. A passive buy-and-hold investor sits through a two-year draw, watching paper gains vanish and reappear. A disciplined risk manager trims over-extended equity positions near the end of a sprint, rotating profits into safe yield tools (like a 5% BIL Treasury baseline) or learns about inverse ETFs and other investments that do not correlate positively with the stock market. 

You don’t need to day-trade to navigate these cycles. You just need to stop treating the stock market like a passive escalator. Just a quick glance to understand the market’s most recent history, a single picture above, is where it starts. 

Rob Isbitts is a semi-retired CIO, former fiduciary investment advisor, and Barchart columnist. Check out his other work at ETFYourself.com (featuring the Fresh Charts weekly trading post), and ROAR.PiTrade.com, helping investors to better-manage their own portfolios.