Equity trends have started to waver lately, with the first attempted pullback following the stalling out of the last week. While momentum and breadth look to have peaked, one cannot rule out that any topping process proves to be a work in progress and won’t be as easy as this week has made it seem. Overall, I feel that Equity indices could prove choppy in the next week before peaking near end of month and giving way to a 5-7% pullback throughout the month of November. As discussed, the drying up in breadth and volume seems to be a warning sign to pay attention to following an extended run. Technology has underperformed lately, and this lagging behavior combined with cyclical and sentiment-based issues arguably should lead Equities lower in November. While intermediate-term bullish thesis remains very much intact, it’s doubtful that US Equities continue to push up into and post-election without any consolidation. Moreover, November’s weakness should represent a short-term correction only, not the start of a larger decline. Risk/reward seems poor in the short run, and SPX seems unlikely to exceed 6000 right away but could find initial resistance near 5900-5935. Meanwhile, QQQ should find resistance at 503-505.
SPX showed its first break of 5820 on Wednesday, which represents the start of a peaking process that might take a week (or two) before leading SPX lower in the month of November.
As shown below, one-month uptrends have been broken for SPX, though the trend from August lows remains very much intact.
Given that Equities were able to push higher throughout September along with US Dollar and Treasury yields, it seems likely that all of these could be nearing a temporary peak in price by the end of October.
Overall, I have less conviction about the next 4-6 days than I do the next 4-6 weeks, where I expect SPX to turn more sharply lower and begin a correction to this historic Election year 22% run-up (Year-to-Date, through 10/23/24).
Thus, SPX price one month for now is likely to be lower than current levels. However, this should turn out to be an excellent buying opportunity as SPX reaches the month of December.
As shown below, until the uptrend from August lows is broken, Equities very well might obey the Election year seasonality chart for October which can allow for final week rallies in October before November’s weakness gets underway.
I feel that SPX likely holds 5700 and bounces into late October, but that 5950-6000 should be a strong area of upside resistance. Thus, upside looks limited for SPX in the next month, while prices might turn lower and head to 5500 once trends at 5700 are violated.
For now, it will pay to keep a close eye on Technology given its weighting within SPX along with recent underperformance.
S&P 500 Index
While the performance of the S&P 500 Utilities index has trounced every year thus far since 2000, with YTD performance of +29.06%, it’s important to put this into perspective for the following reasons:
- Interest rates dropped sharply from April until September, making Utilities a competitive group to favor for those hunting for yield.
- AI-driven performance has boosted returns in the power generation companies, transforming the Utilities sector into a much different looking group than 20 years ago.
- Utilities outperformance does not translate into a Defensive market posture given the relatively low relative returns out of other defensive sectors like Consumer Staples.
- Utilities’ absolute performance has been strong for 2024, but as shown above, its relative performance vs. S&P 500 this year barely makes the top 10 in performance, showing an outperformance of just +5.12%.
- XLU, like many Sector SPDR ETFs, is a poor choice of a way to gain a proper perspective of the Utilities sector, as four Utilities make up more than 1/3 of this ETF: NEE -1.61% , SO -1.85% , DUK -1.52% , and CEG 0.08% which comprise more than 35% of XLU.
As can be seen below, the channel connecting highs of XLU over the last decade hits around $86-88 in XLU, depending on when prices arrive there. This has been an important area of overhead resistance based on the projections of the last decade, and I anticipate it will again provide strong resistance.
Furthermore, we see that prior peaks in 2020 and also 2022 showed monthly DeMark-related exhaustion at the prior swing highs of the prior 5 years. The current signals show a “10 count” which would be possibly completed in three-months’ time.
Thus, I suspect that a push up to the mid-to-high $80’s which occurs between now and early next year would signify a much higher probability area to expect Utilities to stall out.
S&P 500 Utilities Sector SPDR * XLU
Utilities relative gains likely capped by Year-end.
As shown below, the relative ratio chart of RYU vs RSP -0.42% shows this Utilities move possibly being near the end of the run-up. Yet, another couple of months of outperformance would create a stronger level to attempt to switch to an Underweight view, technically.
The relative breakout of the Utilities sector vs. S&P 500 in Equal-weight ratio form (To strip out the influence of the larger Utilities) happened in late Spring of 2024. This drove some sharp outperformance in Utilities which was proper to respect.
As the monthly chart shows below, this ratio (RYU/RSP -0.42% ) broke a two-year downtrend of underperformance, signaling a likely shift in this performance for 2Q-4Q of this year.
At present however, the lengthy intermediate-term downtrend of Utilities relative performance has not been exceeded. Thus, while the short-term trends for Utilities remain in good shape, these are not likely to last into 2025. (At least for the first six months of 2025).
The key takeaway here is that it’s proper to own and favor short-term outperformance in Utilities, but that doesn’t change the larger Neutral view, technically speaking, given the lengthy downtrend.
Within the next 2-3 months, strength in this sector should find strong resistance and reverse course.
RSPU/RSP
Utilities Outperformance tops all other sectors on a 3-month and YTD basis.
This performance chart of all 11 sectors shows that Utilities has outperformed all other 10 sectors on a Year-to-Date (YTD) basis (Sector performance of the 11 Equal-weighted S&P 500 ETF shown below, ranked by YTD Returns).
While I respect the Industrials sector’s strength as making it bullish on an intermediate-term basis, given its push to new relative highs vs. S&P, one cannot say the same about Utilities, Financials, or Consumer Discretionary when viewing relative charts of these sectors.
Thus, sector performance of these three sectors has to be studied closely for evidence of any trend reversals in relative performance in the months to come.
Invesco S&P 500 Equal Weight ETF
TLT’s decline has coincided with some 1-month underperformance in Utilities. That might end soon as rates peak.
One unsurprising observation of 2024 concerns the outperformance of Utilities when rates are falling, vs. the underperformance when rates start to rise.
We discussed this sector being a possible yield substitute earlier in the report, but it’s notable that the bounce in Treasury yields since September resulted in Utilities not performing as well as it had in the prior few months and YTD when yields fell.
My own analysis for Yields suggests that a peak should be approaching by the end of October and might be in place by the end of this week. Conversely, as seen from a price perspective, Treasuries should be bottoming and about to turn higher.
This TLT chart (20-Year Bond Ishares ETF) has pulled back sharply over the last month but is now approaching a likely temporary bottom.
Technically one can make this case based on a combination of Eliott-wave theory, cycles, and DeMark exhaustion indicators, and suggests that TLT should bottom in the next week at a price near $91-$91.50.
I’ll discuss this more when TLT reaches its downside target and begins to turn higher. However, the key takeaway here is two-fold:
- Treasuries look close to bottoming (yields might peak and fall through year-end)
- Utilities likely outperform as yields fall for the balance of Q4.
20+ Year Treas Bond Ishares ETF
