Heads Up: As I am in transit tonight, there is no video associated with this report.
Equity trends remain bullish but fragile as we near the end of October. Stocks, Treasury yields, and the US Dollar look to all be close to beginning a corrective pullback, which likely starts in early November but should prove short-lived and not the start of a larger decline. Minor pullback attempts this week have failed to do much damage but should ultimately result in 5-7% declines in US Equities for the month of November. While the intermediate-term bullish thesis remains very much intact, it’s doubtful that US Equities will continue to push up into and post-election without any consolidation. 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.
The seasonally bullish final week of the Election year, October, might allow for some temporary strength into the end of the month but should still be followed by a 5-7% pullback in November into early December before turning back higher. 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 should lead Equities lower in November.
Friday’s breakout in Technology was a positive development for SPX and QQQ, with both achieving minor breakouts which should help trends push higher during the seasonally positive final week of October.
As of mid-day on Friday, Technology was the only major sector up more than 1% on the session. However, seven (of 11) sectors were down on the day, with notable weakness out of Financials.
If what I’m thinking is correct, there could be some temporary mean reversion back lower in Equal-weighted SPX in the next week, which might diverge from SPX, which can push higher on Technology’s strength.
This might also have the effect of causing some breadth deterioration into the end of October which follows a period where breadth had already been contracting in the short run following several weeks which proved to be nearly unchanged in price.
While Friday is certainly a short-term positive, it is important to recognize that the broader market is actually negative as of 1:15 pm EST today, lower by -0.20% as numerous sectors weaken.
If my thinking is correct, markets might very well show continued sub-par breadth on this push-up into the end of October ahead of the US Election. As discussed earlier this week, upside risk/reward is starting to look poor and gains likely are limited to 5950-6000 on the upside, while pullbacks could reach 5500 on the downside.
Today’s move, however, is indeed a short-term structural positive for SPX which has been driven by Technology strength. Above 5865 should help SPX reach the 5950-6000 upside target before consolidating in November.
S&P 500 Index
As discussed, the following issues remain constructive for the US market:
- Intermediate-term bullish technical structure
- Healthy intermediate-term breadth levels with multiple sectors participating
- Intermediate-term sentiment gauges not at extremes
- Weekly cycle trends suggesting rallies into next Spring
- Bullish intermediate-term trends on many Magnificent 7 names
- Technology underperformance has not resulted in this sector breaking down
- China’s re-emergence should help areas within Consumer Discretionary along with global demand picture
- Short-term seasonality for the final week of October is constructive for a rally into early November before any peak
- QQQ bullish pattern does not yet look complete and could allow for a final push up to 503-505 before stalling and reversing course.
Conversely, the following issues have crept up to cast doubt about US Equity markets continuing higher through both November and December without a correction:
- Weekly negative momentum divergence.
- Intermarket divergence- NASDAQ is not yet at new highs, nor are Transports and Small-caps.
- Elliott-wave pattern looks to be in the final wave up of a 5-wave advance from August.
- Lack of Bears- Equity Put/call hit 0.42 last week.
- Cycle composites show Equity weakness starting in late October and lasting through November.
- Short-term breadth erosion- Percentage of SPX names above 10, 20-day m.a. have plummeted over the last month.
- DeMark exhaustion- Monthly TD Combo 13 countdown signals are now present on Equal-weighted S&P 500 (RSP -0.42% ) and ^SPX -0.11% .
- Technology underperformance lately looks important given that this sector is 30% of SPX and many key large-cap Tech stocks remain in trading ranges.
Technology’s minor breakout should help this sector bounce into early next month
Overall, today’s outperformance in Technology is certainly a short-term positive for this sector after a difficult month of underperformance.
As daily charts show of Equal-weighted Technology (RYT), Friday’s gains (as of mid-day) are breaking out above the downtrend from mid-October.
This is a positive after several weeks of range-bound trading, and are helpful for Technology to show further near-term outperformance over the next couple weeks.
Invesco S&P 500 Equal Weight Technology ETF
QQQ achieves a minor breakout, which should result in a test of July peaks
As shown below, the move in technology today proved to be a very constructive development for QQQ, which surpassed former highs and reached the highest levels since July.
Today’s move above earlier October peaks has little to no resistance until 503-505, which might prove to be a difficult level to immediately surpass.
At present, the broader market doesn’t seem to be demonstrating the same strength as QQQ, but this daily chart’s minor breakout is positive towards thinking July highs could be challenged in the next week.
To gain more conviction about the intermediate-term view, it would be helpful to see QQQ along with DJ Transportation Avg. and also IWM -0.46% break back out to new highs to join SPX and DJIA.
However, despite some disappointing market breadth on Friday, this does look to be an encouraging technical move.
Invesco QQQ Trust
October could end on a good note, given Election year seasonality
To paraphrase some thoughts from earlier this week:
Despite the poor showing in US equities following October expiration, the final week very well might turn higher back to new highs, given the seasonal bias in most Election years.
Looking back, the fact that a minor bottoming process looks to have occurred today following little to no initial damage on the market decline early this past week creates an optimistic view about the possibility of a pushback to new highs ahead of the US Election.
As shown on this Election year intra-month chart, October seasonality has nearly played out to a tee” thus far.
While this past week proved negative, it could be likely that the coming week will turn back higher. Today’s technology break is a step in the right direction.
