Investable Low Potentially Developing in Next 2-3 Weeks
Last week, I outlined a roadmap for the S&P 500 through October into the election. I expected the oversold bounce that began on September 22nd to stall heading into the end of September and beginning of October. I continue to expect a choppy, zig-sag pattern to play out into the third week of October coinciding with another option expiration week.
In case you missed it, I recommend taking a look at the daily S&P 500 chart in last week’s note for the path I’m expecting. So far, markets appear to be following that roadmap with the S&P beginning to stall near resistance between its 50-dma (3362) and its highs near 3428 that developed on September 16th.
While I’m still expecting a choppy market for the next 2-3 weeks, I remain bullish on equity markets through year-end well into 2021 based on our 4-year market cycle analysis. While more strategists and commentators turn negative and view the current market as uninvestable until after the election (and possibly later given the prospect for a disputed election), I encourage readers to remain open to the possibility that an investable low develops before the election. As I mentioned above, the week of option expiration between October 16th for equities and October 20th for index options could define the bottom of the correction that began at the end of August.
Stepping back from the short-term, daily chart of the S&P 500 I used last week, the weekly chart below provides a technical perspective supporting my view. The top panel is the price of the S&P 500 illustrating the rally into resistance (red dashed line) followed by the pullback to first support near the June highs at 3233. The indicator in the bottom panel tracks the percentage of stocks with rising weekly momentum. Think of it as a way to see the percentage of stocks that are accelerating over 3-6 month time frame.
There are two noteworthy technical points here. First, the oscillator peaked in June which coincides with the peak in most cyclical stocks which was followed by further downside in the indicator as growth stocks began to correct through September. Secondly, the oscillator is now in oversold territory and showing signs of bottoming which is why I encourage investors to be keep an open mind and begin looking for buying opportunities to develop in the coming 2-3 weeks. The blue line is the path I expect the oscillator to track through Q4, which so far, it has been tracking closely.
Bottom Line: I am already seeing early technical evidence of a potential bottoming developing in the coming weeks and recommend investors be prepared to redeploy cash in the coming 2-3 weeks.
Figure: Weekly Sector Review
Source: FSInsight, FactSet
Figure: Best and worst performance sectors over past 3 months
