Equity markets pulled back this week but I’m expecting the current pullback to be short-lived with further upside into year-end and early Q1. By February, however, weekly indicators tracking 1-2 quarter shifts are likely to be overbought after bottoming at the beginning of September with most cyclical stocks. The pending pullback into Q2 should prove to be a healthy pause within a bull market that likely continues higher through into year-end 2021.

Interestingly, despite that longer-term outlook, many investors are focused on the very short-term, asking for the likely path for the S&P into year-end. If you recall, in last week’s note (here) I outlined the technical reasons why a short-term pullback was likely pending. Yellow flags included the Russell 2000 Small-cap Index surging 30% from its September lows, while low put call ratios and elevated bullish sentiment indicators were potentially signaling excessive near-term optimism. Equities markets were increasingly choppy moving through the past week with declines on Monday and Wednesday, anemic trading on Thursday and further weakness into mid-day on Friday as I write this note. Daily momentum indicators, tracking 2-4 week swings, are negative, which understandably has short-term technical traders expecting further weakness in the coming weeks. All of these are legitimate concerns but I would counter, that so far, the actual price profile, or shape of the equity market remains positive. Breadth or participation remains very broad and beyond pulling back for just one week, the number of stocks in uptrends remains robust.

Short Lived Pullback Underway - Key S&P Levels to Focus On

My expectation continues to be that this pullback will be shallow and short lived. Looking at the S&P 500 in the chart below, note the momentum indicator in the top panel has turned negative down again as the S&P pulls back from its recent all time high. While it’s certainly possible the pullback could last longer than I expect, I would point out that the decline is only testing first support at the 15-day moving average (green line) which often acts as trading support. From my perspective the S&P would need to close below its 5-day moving average (3649) to even signal the beginning of a correction and would next support is very close by between the 23.6% retracement at 3600 and September highs at 3587.

Bottom Line: As more traders begin to focus on lower levels for the S&P 500, I expect the S&P to hold above its first band of support between 3600-3650 round numbers and head higher into year-end.

Figure: Weekly Sector Review
Source: Fundstrat, FactSet

  • There was no material change to the relative performance trends for most sectors.
  • Communication Services were noteworthy strengthening this week to challenge the upper end of the 2020 trading range but a successful break-out has yet to develop
  • Defensive sectors, such as Staples and Healthcare bounced but remain in relative performance downtrends
  • Technology see-sawed for the week closing weaker in relative performance vs the S&P 500 while more cyclical sectors, such as financials, materials, industrials and energy, remain above rising 50-day moving averages of relative performance.
Short Lived Pullback Underway - Key S&P Levels to Focus On

Figure: Best and worst performance sectors over past 3 months

Short Lived Pullback Underway - Key S&P Levels to Focus On

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