Short-term US Equity trends have still grinded largely sideways in recent weeks following the bullish breakout back to new all-time highs for SPX and DJIA. Despite minor early weakness following the escalation in the Middle East, Equities barely showed much true weakness and managed to recoup half of the earlier decline. My technical thesis is unchanged: I expect markets to stabilize and turn back higher to new highs, which necessitates a bullish stance. Despite the bearish seasonality trends, it’s hard to be too negative on recent price action, which combined with rising momentum and above-average bullish market breadth, still suggests the path of least resistance is higher, not lower. Moreover, triangle patterns have been exceeded to the upside for SPX, and DJIA, and heavy SPX-weighted stocks like AAPL 0.39% have also just broken out of existing triangle patterns. Overall, without evidence of any serious technical damage, it’s difficult turning too negative on US equity markets.
Making quick decisions to go against existing trends on Exogenous events is typically wrong!
Just in the last two weeks, we’ve seen
- Massive flooding and a rising death toll in North Carolina in the wake of Hurricane Helene, with hundreds of people still missing.
- Half the ports in the country are set to potentially shut down as Longshoremen begin a Strike that might cost billions every day.
- Iran has just launched a ballistic missile strike against Israel.
- 2 American MQ-9 Reaper drones have been shot down by Yemen’s Houthi Rebels.
And it’s Just the first day of October!
S&P, however, successfully managed to recoup nearly half its losses on Tuesday, pushing back into the range that’s been holding US indices largely range-bound over the last couple of weeks. As much as I’d like to claim that the “market is wrong” and US Stocks should be moving lower, it’s rarely correct to pay attention to news-driven events and consider them important in causing movement in the US Stock market.
Until benchmark averages manage to pull back to new multi-week lows, or show more meaningful signs of breadth erosion with bullish sentiment, it’s normally thought that the recent push to new all-time highs should be viewed as bullish, not bearish.
I don’t disagree. S&P’s attempted pullback likely should not prove long-lasting at this time and should be on the verge of beginning yet another rally back to new all-time highs into mid-to-late October. If SPX manages to climb above $5825 into October expiration, there might be cyclical and exhaustion-related measures to respect which could argue for some weakness into/after the US Election next month. At present, it’s hard to make much of this price action as being all that bearish.
S&P 500 Index
Seasonality typically shows the period following October expiration to be the worst time for SPX during Election years
The average trajectory in Election years going back since 1950 shows a pretty muddled picture between now and October Expiration before a steep slide into 10/26.
The Median return for October in Election years since 1950 is +0.1%, far worse than September’s +0.4%. Thus, while most in the Financial media discussed how bearish September normally can be as a month that brings volatility, they neglected to factor in Election year seasonality in their comments.
At present, there hasn’t been sufficient evidence that Tuesday’s decline could morph into something more negative for this month. Thus, technically, it should be right to still favor a rally back to new high territory. Cycle composites for SPX line up with this point near 10/18 to suggest that rallies into October expiration might prove important as an inflection point. Given the success in many breadth indicators turning sharply higher in recent weeks, I suspect that any drawdown would prove short-lived and limited in scope.
Percent of SPX names within 20% of 52-week highs has neared 2024 highs
In what’s clearly thought to be a healthy sign for US stocks, charts of SPX’s “Percentage of Stocks within 20% of 52-week highs” have now risen into the high 80s, which is close to the highest levels of the year.
This is a much different picture than what happened back in 2021 ahead of the bear market of 2022.
As can be seen on the left-hand side of this chart, breadth began to erode dramatically, starting in Spring of 2024. By the time of the actual SPX peak during the first week of January 2022, this percentage had dropped sharply from its Spring 2021 highs.
At present, breadth is going the opposite direction (higher) coinciding with the breakout to new highs for SPX. This is thought to be a healthy sign and makes me confident that recent churning will still be resolved higher for US benchmark indices, not lower.
S&P 500 Breadth – Percent Within 20% of 12-Month High
Treasury yields look to be turning lower. I expect a pullback to 3.52% for TNX into mid-October
The rolling over in US Treasury yields on the geopolitical escalation suggests that a move back to new monthly lows for ^TNX 1.12% is likely for the weeks ahead.
Yields pulled back to multi-day lows following no concrete evidence of having bottomed. Tuesday’s yield decline was far more serious as a negative, than the last week of yields rallying.
While a bottom in yields looks possible for mid-to late October coinciding with a possible bottom for US Dollar, I’m skeptical that either TNX or DXY has bottomed thus far.
If/when TNX moves down to 3.52% in the weeks ahead, this might be a time when Gold and Silver might also start to peak out following a stellar push back to new highs. At present, based on Tuesday’s decline in yields, it looks right to expect a pullback to new monthly lows for TNX.
