Trick Or Treat from the FOMC? Equity rally will accelerate short-term if early Oct. lows are recouped
- US Equities have begun a bounce; Yet recapturing early Oct lows adds to conviction
- Financials are seen as a Technical Overweight into Yr-end; Healthcare as an Underweight
- US Dollar cycle composite arguably should peak in November and turn lower into next Summer
SPX and QQQ very well could have bottomed last Friday on a perfect 3-month anniversary to the peaks from late July. However, as discussed in recent days, indices require a daily close back over early October lows to have proof that a larger bounce has begun. Interest rates look to pull back into late next week, and this likely can coincide with our much-anticipated Equity bounce. Overall, given widespread technical damage in many sectors it’s going to be important to see more evidence of a rolling over in both US Dollar and Treasury yields to have confidence of a sustainable rebound.
As October came to a close, SPX has the dubious honor of facing its first three-month losing streak since 2020 and only the 2nd time in 33 years that August, September and October have all turned in consecutive negative returns. (2016 also featured this three-month decline.)
This doesn’t imply that the “bear market is back,” in my view. However, given the volatility expectations for mid-November, it means that “much work needs to be done” to repair all the technical damage of the prior month.
It’s thought that a bottom is happening this week which should lead to US Equity rally into late next week, ideally into 11/9-11/10 timeframe. Then arguably markets could be vulnerable in mid-to-late November as numerous short-term cycles start to exert a negative influence during a time that also involves a possible US government shutdown.
In the short run, SPX has successfully recouped the 4189 level mentioned in last night’s report. It also exceeded a short-term downtrend over the last couple weeks. These arguably are both positives that give a higher probability that short-term lows might be in place, with SPX having bottomed at a perfect 90-day cycle from the late July highs.
However, I believe one final piece of the puzzle is necessary and this could occur following Wednesday’s FOMC meeting. If SPX can close any of the next few days of this week above 4216, this would suggest lows are in for the time being.
Furthermore, this should help propel SPX up to near 4330 (Between 38.2% -50% retracement) then 4357-63, which represents both Gann targets and the 50% retracement area of the first meaningful resistance from the recent three-month decline.
At present, I am skeptical that mid-September peaks of 4511.99 are exceeded in November.
Financials are being lifted to a Technical “Neutral” rating
Despite many Money-Center and Regional Banks trading in well-defined Downtrends, Financials on an Equal-weighted basis have been the best performing of any of the major sectors in the past week, and Invesco’s Equal-weighted Financials ETF (RSPF -0.01% ) has been higher by nearly 1% into 10/30/23.
Financials are also the 3rd best performing sector over the last month, also when viewing the sector in Equal-weighted terms (When comparing XLF -0.07% returns, this drops to 5th best out of 11 over the last month).
Ratio charts of RSPF to RSP (Financials vs. S&P 500 in Equal-weighed terms) a monthly DeMark buy signal was confirmed at the end of September on this relative chart, and this ratio has risen to the highest levels since March 2023.
This is a positive towards expecting further relative strength between now and year—end out of Financials, and I believe that a Neutral rating makes sense given impending signs of this sector stabilizing and possibly turning higher on an absolute basis to match its relative outperformance vs S&P 500.
While it’s difficult not to be selective in this sector given the degree of absolute weakness which has taken place in recent months, I favor the following stocks technically for outperformance within the Financials sector:
CBOE 0.35% , V -0.22% , MA 0.13% , AIG -0.61% , PGR -0.89% , AIZ 0.73% , and HIG -0.54% .
Generally, I prefer being long the Insurance stocks while interest rates have not yet peaked, along with Exchange stocks and Credit card companies. Regional banks have gradually started to stabilize, but one needs to be cautious about trying to overweight the Regional Banks without more evidence of strength.
Healthcare looks like an Underweight for 4Q given lengthy trendline violations
Unfortunately, many parts of healthcare remain under pressure, and this group does not appear to be bottoming technically. Biotechnology, Medical Devices and Healthcare Providers along with Pharmaceutical stocks have all shown abnormal weakness in recent months, which makes selectivity important in this sector as well.
Technically, I view the break of this uptrend as being a bearish factor for this sector heading into year, as it spans nearly four years. Additionally, despite this ratio chart of RSPH 0.03% (Invesco’s Equal-weighted Healthcare ETF) vs. RSP (Equal-weighted S&P 500) having reached last year’s lows, there is no evidence of downside exhaustion on weekly nor monthly charts, similar to what marked a bottom last Fall.
I had entered 2023 with four sectors as Overweights: Technology, Industrials, Energy and Healthcare. Unfortunately, Healthcare has not worked out and does not look to outperform in the weeks ahead. On any stock market rebound, I suspect that Healthcare as a defensive sector would not show the same kind of relative strength as Technology, nor Industrials.
For those favoring Healthcare, I like UNH, VRTX 0.92% , BSX -1.16% , MCK -0.60% , and BDX 0.36% technically, and feel like MRK -1.38% , LLY -0.84% and NVO 3.35% are attractive risk/rewards on weakness into early December.
US Dollar cycle composite charts show weakness into next Summer, and should turn down quicker as Yields roll over
USDJPY immediately surged back to new highs immediately after I discussed yesterday, and this is a temporary period where further declines might happen in the Yen into mid-November. However, I still expect that USDJPY should have limited upside and 152-154 area should be very strong resistance.
The Bank of Japan (BOJ) higher inflation forecast reversed the Yen’s rally, despite the tweak and replacement of its 1% hard level for JGB yields with more of a “reference” level. Overall, the key to whether Yen weakness is sustainable revolves around the conviction level of the traders in response to the BOJ’s new policy. I suspect that this will change in the weeks to come and that USD/JPY has limited upside.
My US Dollar cycle composite looks quite similar to the Treasury yield model, which makes sense, given that the correlation between the US Dollar and Yields has proven strongly positive historically. Thus, any act of rates pushing back above 5.00% in the 10-year Yield likely could postpone an immediate decline in the US Dollar index (DXY).
Overall, my feeling is that the Dollar and Yields likely peak out by late November/early December, and this coincides with a more sustainable US Stock market rebound.
At present, I do not feel USDJPY has an attractive risk/reward to move much higher, and feel that it’s right to view this cautiously, expecting a peak sometime next month.
DXY Cycle Composite- Bearish into next Summer
