Key Takeaways
- US Equity indices testing last week’s lows keep the near-term bearish trend intact to end the month and quarter. A support violation looks likely, but should prove short-lived
- Technology outperforming on Thursday’s break, while Discretionary, Materials, Financials, Industrials, Staples and REITS all down more than 1%
- Breadth down just moderately; Volume not all that capitulatory on weakness but fear gauges continue to climb
2 Possible scenarios as Q4 gets underway:
- S&P holds 4300 and then turns up right away. This is a possibility and would think possible if there were a positive catalyst (vote) but important that 9/20 lows hold SPX 4305
- 4300 is broken, which would give way to a challenge of 4221-33 (Fibonacci support and July lows) or under near 4125. (Page 1 shows these Fibonacci projections)
Increasingly this second scenario is becoming more probable given that markets have not even entered the volatile month of October, and DeMark-based Exhaustion signals are not yet in place to suggest a meaningful low after 5% down. Furthermore, structurally the quickness with which markets have sold off this week (particularly this past Tuesday argue for a bit more weakness, not an immediate bottom.) Finally, evidence of capitulation is not yet in place on this decline, but something to watch for
However, rapid downdrafts into October historically have given way to reversals back higher, and Sentiment gauges are increasingly showing more evidence of fear on the rise. Moreover, technology, to its credit, is holding up quite well of late and not breaking down relatively to the SPX.
As seen below, SPX has broken its uptrend from this Spring, and set to finish out the month of September down roughly 4.3% while still being higher by 1.5% for Q3. Momentum has turned down sharply and MACD diverging lower while RSI has hit new lows for the year on weekly charts. We’ll need to see some evidence of holding last week’s lows and some evidence of real upward thrust in momentum to have confidence, which for now, is lacking in the short run.
From a sector standpoint, (SPX GICS Level 1 Sector SPDR ETF’s ranked by 3 month returns) the following its noteworthy:
- Financials outperformed all other major sectors in Q3, while Consumer Discretionary and Healthcare rounding out the top 3.
- Only two Level 1 sectors were positive in September: Energy & Consumer Discretionary
- Defensive groups like Utilities, Staples & REITS were all down more than 2% in September, unusual perhaps given S&P falling nearly 5% and seen as a positive
- The narrative of higher rates negatively affecting Technology certainly looked to have played out this past month, while bolstering groups like Financials
- Technology certainly hasn’t been too adversely affected, despite September’s decline and still finished fourth best in Q3, with returns (at present, ahead of Thur close) of 1.75%
