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US Equity markets look to be bottoming in the historic “bear-market killer” month of October following oversold conditions during a time of seasonal tailwinds and bearish sentiment. The effect of the attack on Israel resulting in yields rolling over looks important and Equities are responding to this more than the perceived Israeli retaliation. SPX having exceeded 4336 should lead prices higher in October
While some might see this as “jumping the gun”, I do feel like there’s a good likelihood that Equity market lows could be in place after the constructive bounce in recent days.
Simply stated, the act of selling off sharply to near key technical levels that makes momentum and breadth reach oversold levels while sentiment grows more bearish often translates into attractive opportunities for Equities.
As discussed most of last week, the following points seem most relevant for why Stocks could be bottoming:
- Insufficient evidence of the Broad-based recovery from May 2023 having been derailed
- Sentiment has gotten a lot more pessimistic and polls like AAII, and Fear and Greed turned quite negative over the past week
- Technology continues to show better relative returns in the short run vs. SPX and remains upward sloping from last Fall
- Intermediate-term Cycles show upward technical bias through next year, with drawdowns proving minor into November
- Short-term cycles look to have potentially provided an attractive entry point during the 10/5-10/12/23 time frame for an October low
- Seasonality in Pre-Election years shows a much more bullish year than Mid-term, or Election years, and Octobers are normally up on average 1.1% in Pre-Election years
- Elliott-wave analysis shows a constructive pattern from May 2023, which should lead back to new all-time highs into next year
- US remains an Outperformer vs. Europe and vs. Emerging Markets
- Interest rates and US Dollar look to be close to peaking out, and Israeli/Hamas conflict has led interest rates across most of the globe lower as of Monday’s session
- Monthly momentum gauges like MACD remain positively sloped, while daily MACD has turned back to bullish by exceeding its signal line.
As shown below, SPX is now back above the important 4336 level that marked former lows. While I’ll gain even more conviction if QQQ can regain $369.15 near 9/9 lows, Monday’s About-face was quite constructive in my work, and I feel it continues.
Near-term resistance might materialize initially near the following SPX resistance zones:
SPX-4390-4401, 4433-63, and then 4530, which lines up near an existing downtrend from July along with being a Gann-based area of resistance from the 10/3/23 low close of SPX-4264.75.
Support lies near 4300 and shouldn’t be tested right away, in my view, as this rally likely shows additional upside follow-through.
Pullback to multi-day lows likely means a peak is in for TNX, and should result on yields retreating
The pullback to multi-day lows likely means that yields can begin a period of weakness and go lower in the weeks to come.
Initially this was thought to happen due to weaker economic conditions and/or more evidence that FOMC might be done with its tightening. However, the sudden attack on Israel has escalated global geopolitical tensions, and rates in many European sovereign debt markets along with US treasury yields have begun to pull back sharply.
The first true area of support should materialize initially near 4.36-4.48% in October. However, the ability to undercut the lengthier uptrend line for TNX (currently near 4.20%) arguably would point to a much larger decline in yields into next year.
While I expect that a larger collapse in Treasury yields down under 4.00% likely does happen in 2024, initially, this 4.36-4.60% range might materialize initially for October into November.
Bottom line, I believe this breakdown in Yields to multi-day lows is negative for Treasury yields and lower yields are likely in the weeks to come.
Defense stock gains pave the way for a breakout in S&P Capital Goods index
One immediate takeaway on the heels of this past weekend’s attack on Israel concerned the rapid gains in many Defense stocks, like NOC, GD, LMT, and RTX among others.
This resulted in a breakout of the existing downtrend for S&P’s Capital Goods Industry group Level 2 index (S5CPGS-Bloomberg).
This seems like a clear technical positive for Defense issues given signs of geopolitical conflict starting to heat up quickly in the Middle East. I expect that this should be an area of outperformance, and LHX -0.24% , NOC, GD, RTX, and LMT look to all be able to gain further ground technically in the days to come.
While some of the ETF choices for this space don’t show the ideal liquidity, ones like ITA 1.95% , the Ishares US Aerospace & Defense ETF, looks to likely gain ground in the weeks to come. Upside targets lie initially near July peaks just above $118.
