Short Lived Pullback Underway - Key S&P Levels to Focus On

Equity markets pulled back this week but I’m expecting the current pullback to be short-lived with further upside into year-end and early Q1. By February, however, weekly indicators tracking 1-2 quarter shifts are likely to be overbought after bottoming at the beginning of September with most cyclical stocks. The pending pullback into Q2 should prove to be a healthy pause within a bull market that likely continues higher through into year-end 2021.

Interestingly, despite that longer-term outlook, many investors are focused on the very short-term, asking for the likely path for the S&P into year-end. If you recall, in last week’s note (here) I outlined the technical reasons why a short-term pullback was likely pending. Yellow flags included the Russell 2000 Small-cap Index surging 30% from its September lows, while low put call ratios and elevated bullish sentiment indicators were potentially signaling excessive near-term optimism. Equities markets were increasingly choppy moving through the past week with declines on Monday and Wednesday, anemic trading on Thursday and further weakness into mid-day on Friday as I write this note. Daily momentum indicators, tracking 2-4 week swings, are negative, which understandably has short-term technical traders expecting further weakness in the coming weeks. All of these are legitimate concerns but I would counter, that so far, the actual price profile, or shape of the equity market remains positive. Breadth or participation remains very broad and beyond pulling back for just one week, the number of stocks in uptrends remains robust.

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