Sentiment getting more fearful as SPX nears the “Moment of Truth”

US Equity markets should be nearing an area of support, but yet Tuesday’s decline was more negative than positive technically speaking, and McCarthy’s ouster post market close leaves market with a lot more uncertainty in a world of skyrocketing interest rates.   Movement down to SPX-4165-85 looks important based on a number of different metrics, and might provide some stability into next week.  However, Treasury yields and US Dollar need to roll over and violate current uptrends before these sectors can truly work. 

Overall, despite the ongoing downtrend, a low looks to be close for Equities and an ideal timeframe for this centers on 10/5 into 10/11 into next week.  Equity markets are nearing oversold levels while fear is ramping up just as US Equity indices have entered the notorious “Bear Killer” month of October.

The following are certainly positives that need to be reiterated, despite the near-term bearish price trends and momentum:

1. Uptrends have not been breached since last October’s lows, so this near-term downtrend remains part of a larger uptrend which has not given way
2. SPX’s upsloping 200-day moving average lies right near current levels
3. Technology continues to hold up well.  Equal-weighted Technology was the best performing of any of the major Sectors on a rolling 1-week basis ahead of Tuesday’s session (10/3/23), positive by +0.07%, while XLK -0.34%  was higher by +0.45%.
4. Elliott-wave patterns show this decline from 9/1/23 as being potentially the 5^th and final decline from early September, and should be nearing a low, possibly into next week
5. Bearish sentiment is growing more pronounced, as seen by Fear and Greed polls having registered “Extreme Fear” readings.
6. DeMark indicators could line up to show daily TD Countdown (13 Buy) by next week potentially in SPX.
7. QQQ had just broken out to multi-week highs vs. SPX as of Monday 10/2/23 relatively speaking (Shown in last night’s report).  Thus, Technology’s strength has resulted in markets holding up far better than otherwise would be the case. 
8. Interest rates and US Dollar have gotten stretched and both seem primed to peak out in the near future, potentially over the next 3-5 trading days
9. US remains a strong outperformer vs. Europe and also is outperforming China
10. Pre-election seasonality shows October to be a strong month for performance.  Thus, despite the negative sentiment while SPX has reached oversold levels, SPX looks attractive at/near 4200.
11. Intermediate-term cycles show a positive sloping uptrend on Composites heading into next year.
12. QQQ has shown positive divergence vs. SPX and/or DJIA and still lies above its August lows.  While this might change briefly into next week, I still suspect that QQQ can hold up relatively speaking, making a strong case for Technology as interest rates begin to peak out on evidence of FOMC pausing.

As mentioned last week, despite markets being in a “window” for a possible bottom in US Equities, the first proof will come from evidence of Treasury yields and the US Dollar peaking out.  It’s thought that Technology very well has the power to hold up the broader market while some of these laggard sub-groups attempt to carve out a bottom.

Additionally there hasn’t been sufficient evidence of true capitulation to argue for a meaningful Equity index bottom just yet.  This might play out over the next week by TRIN registering extreme levels based on heavy downside volume, or extreme backwardation in the VIX Futures curve.

On the downside, multiple projections now suggest that 4165-85 could have importance for SPX, marginally below its 200-day moving average (m.a.), but one which lines up with a few various Fibonacci projections which I’ll shed some light on below:

• 4185-6 lines up with a 3x extension of the initial pullback from July when measuring from 9/1/23 peaks

• 4185 also is the 38.2% Fibonacci retracement area of the 10/22-7/23 rally

• 4160-85 would allow the most recent decline from September to represent between 0.50-0.618% of the prior decline from July.

While I do not expect a move down under 4160, a daily close under that level would likely result in 4053 being tested (50% level of the entire rally up from 10/13/22-7/27/23)  That seems unlikely, but can’t be ruled out if prices become more volatile into end of week.

Fear and Greed index is now in “Extreme Fear” territory

CNN’s Fear and Greed Index has now entered “extreme fear” territory.  While this is one of several sentiment gauges I employ, it’s insightful that current readings have dropped to new lows for 2023, lower than what was registered back in March.

Current readings are near last October 2022 levels, while Percentage of stocks above their 20-day moving average has dropped down to near Single digit territory.

AAII, Investor’s Intelligence data along with Daily Sentiment index (DSI) readings and VIX backwardation are all getting more negative, suggesting that lows are near.  If/when Majority Leader McCarthy’s ouster causes added market uncertainty and volatility in US equities in the days ahead, this could likely lead to some of the volume-related spikes in TRIN (Arms Index) that would make a low likely into mid-October.  Stay tuned.

Healthcare remains largely neutral over last two years relative to SPX

Healthcare has proven to be quite a bit weaker than expected in recent months on an absolute basis, but in relative terms to SPX, this sector happens to be largely range-bound when viewing Equal-weighted Healthcare vs. Equal-weighted SPX.

This was one of four sectors I decided to overweight back in January along with Energy, Technology and Industrials.  The numerous failed rally attempts which have resulted in this pulling back to its consolidation suggest that it remains Neutral and not bullish nor bearish relative to SPX.

It hasn’t held its defensive nature as markets have weakened, and is not thought to likely outperform when Equity markets begin to bottom and turn back higher right away, which in my view favors outperformance out of Technology and Industrials.

Unfortunately, both Biotechnology and Medical Devices have weakened lately and might be inversely proportional to the move in interest rates.

Furthermore, given the Administration’s plans on tackling Drug pricing, many stocks within the Pharmaceutical arena have acted a lot worse than normally might be expected in defensive times. The added pressure of some Mergers and Acquisition scrutiny from the FTC might have also added some undue pressure on this sector.

Overall, until rates can peak, which might help the Medical Devices ETF (IHI 0.05% ) bounce, or IBB -0.04%  to stabilize, I find it difficult to be bullish technically on Healthcare.  I will revisit this sector, but it’s thought that outperformance might be a 2024 event and not 4Q-2023.  Selectivity is key for Healthcare in Q4-2023.  As was written in Tom Lee’s report last night, my technical rating on Healthcare is Neutral, not bullish.

The proof is in the Trendline break for Healthcare

Recent weakness has been strong enough to violate existing uptrends for XLV going back since last Fall.  Given that this held twice before, this is thought to be bearish, and not something to buy into right away.

While I mentioned Healthcare in a positive light on its relative breakout, it’s shown just scant evidence of trying to hold up relative to SPX.  This sector ranks 5^th in absolute returns out of 11 over the past week, returning -1.59% through 10/2/23.

XLV performance has actually been far better on a 1-month and 3-month basis compared to RSPH -0.10% , the Equal-weighted Healthcare ETF from Invesco, and XLV has outperformed by more than 200 basis points (b.p.) over the past month and more than 500 b.p. over the past three months. 

This outperformance is thought to directly correlate to interest rates surging which have affected Small-caps negatively compared to Large-Cap based on style.  Until rates start to rollover, I anticipate that XLV should continue to fare better than RSPH.

On an absolute basis, I expect that XLV should trend down to $126 which represents former monthly lows and the first real area of importance.

However, breaks of this level argue for a lengthier decline down to $124.  Overall, until/unless XLV can recoup this former uptrend, it’s difficult to think too positively about this sector, technically speaking.

Two standouts which I feel are worth revisiting are LLY -2.02%  and NVO -1.19%  on weakness which is growing closer to near-term support.  Ongoing outperformers like REGN -1.05%  and VRTX 0.72%  are still attractive technical longs with the group.