Transports, Regional Banks, and Small-caps might all bottom by mid-October

US Equity markets should be nearing an area of support, and Treasury yields and more meaningful rallies might begin for both Equity indices and Treasuries starting next week, potentially coinciding with weaker economic data and/or more evidence of FOMC pausing their rate hikes.  Movement down to SPX-4165-4200 looks important based on a number of different metrics, and might provide some stability into next week. 

Overall, US Equity markets look close to bottoming given the following reasons:

• Bearish sentiment has arrived via Fear and Greed, AAII, Investors Intelligence & elevated VIX

• Bullish seasonality in Pre-election years suggests October normally works well following a sub-par August and September.

• Elliott-wave analysis argues that this might be the final pullback from early September as well as from late July 2023.

• Market breadth readings have reached levels that historically have coincided with market bottoms.

• Structural support is getting closer, and SPX should find strong support at 4165-4200 over the next week.  200-day moving average along with uptrend line are just below current levels

• Technology has held up better than expected, not just on a cap-weighted basis but also an Equal-weighted basis. 

• Treasury yields and US Dollar have lost some short-term momentum, and DeMark-based exhaustion is now apparent on daily and/or weekly charts for both which argue for a downturn in 4Q.

• Laggard groups which have underperformed dramatically in recent weeks now look to be closing in on support.  Regional Banks, DJ Transportation Avg., and Small-cap ETF, IWM 0.05%  all look to be within 1-2 weeks of finding bottoms near prior lows and/or important support.

This hourly chart shows the ongoing bearish wave structure, which looks to be in its final stages of a five-wave decline since early September as part of a possible “ABC” pattern from late July. While a negative Jobs report might result in Treasury yields turning down more sharply (which would be a positive for Equities) the more likely result might be strength which causes a “last ditch” rally in Treasury yields which doesn’t make too much headway and then peaks out.

While I find it quite possible that SPX-4200 might be briefly undercut, which would throw a wrench into the analysis of those eyeing the 200-day m.a., meaningful support lies just below at 4165-85.  The hourly SPX chart below appears technically negative until/unless SPX can regain 4335.  Any pullback that violates 4216 likely falls to 4165-85 before bottoming.  I’ll narrow this down as we get closer.

Small-caps are now nearing key levels within 1-2 weeks and likely stabilize and turn higher as Yields roll over

Small-caps, as measured by the Russell 2000 Ishares ETF, IWM 0.05% , are now closing in on very important support after this recent weakness.

Absolute and relative charts of IWM/SPY both suggest that Small-caps should bottom in October/November timeframe and then turn higher.

IWM now shows two separate DeMark-based “13 Countdown Exhaustion buy” signals.  However, it’s still hard structurally to buy IWM until these signals are confirmed and some evidence of strength occurs.

Overall, I suspect that another pullback attempt might occur between Friday 10/6 and next week.  If IWM gets down anywhere near $165-$167, this would create a very favorable risk/reward situation.  I feel that Small-caps will start to show better traction as Interest rates peak, and this likely should be in place by November, and initially possibly by the end of next week.  Thus, risk/reward has already begun to appear a bit more favorable considering that IWM fell from near $200 from late July.

DJ Transportation Average is also nearing important support

Not just Small-caps are starting to look interesting, but the Transports are also nearing key intermediate-term trendline support that makes this group far more appealing heading into mid-October.

TD signals could potentially signal a weekly TD Buy Setup as of next week, which conveniently could occur right near a prominent area of uptrend line support.

Overall, Airline stocks have represented 3 of the worst 10 performers within the DJ Transportation Avg over the past month.  While this sub-sector might take a bit more time to bottom given how negative the momentum has gotten lately, Transports look to be nearing key support.

I favor buying dips in Transports as well as Industrials as a whole in October on weakness into next week.  This group should be close, and I expect the leading groups like Transports will begin to act better in the back half of October.

Regional Banks also look close to bottoming

Regional banks have performed miserably despite rates pushing higher in recent weeks.  This has proven to be a much worse part of Financials than the regular Banking space when measuring relative charts of the Ishares Regional Banking ETF, KRE 0.85% , relative to the KBW Banks index KBE 0.44%  which has trended down over the last few months.

I suspect that KRE is closing in on a low, similar to Transports and Small-caps, as shown above, given a combination of oversold conditions, DeMark exhaustion approaching, along with poor sentiment, and structural support found just below.

However, the area at $38-$39 looks more appealing than current levels.  (KRE 0.85%  closed at $40.98 as of Thursday 10/5/23’s close.)

Any further deterioration in this part of Financials over the next 1-2 weeks should help KRE 0.85%  get down to more meaningful areas of technical support.

Conversely, any breakout above $42.36 from late September would also be important as making KRE 0.85%  more attractive technically.  However, this seems less likely heading into the anniversary of last year’s Market lows, which bottomed on 10/13/23.

Overall, it looks correct to await a bit more weakness into mid-October, with the knowledge that Regional banks are getting closer to bottoming, technically speaking.