Watch for Pause; Stay Long Stks, Particularly Cyclicals

A short-term pause looks to be developing for the Standard & Poor’s 500 index as it stalls under resistance at the summer highs between 3000-3029. During the September rally, short-term momentum indicators have moved toward overbought levels. This generally suggests a 2-4 week pullback/pause.

However, the far more important point, particularly for investors versus traders, continues to be the bullish longer-term view that remains in place, suggesting further upside in the 4Q and well into 2020. In other words—and yes the cliché is overused but it is very applicable here—don’t lose sight of the forest for the trees. Stay long stocks.

Regular readers know I remain positive on cyclicals. Take a look at this week’s three panel chart below of the S&P (top panel), the S&P 500 Industrial ETF (XLI) and the S&P 500 Financial ETF (XLF). All three price patterns have been trading sideways above their long-term uptrend represented by a 4-year or 200-week moving average. The bottom line here is that despite all the gloomy recessionary headlines, their 18+ month consolidations are very near to resolving to the upside. These are not bearish charts in my opinion but merely cycle pauses within an ongoing secular bull market similar to what developed in 2016. For more on the broad market pause, see page 3.

Bottom line: The technical backdrop remains bullish for the broader equity market with a shift back toward cyclicals beginning to develop. My recommendation continues to be increasing exposure to cyclicals sectors, such as industrials and financials, and reduce exposure to safety sectors, such as utilities and consumer staples.

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