Small-caps should be overweighted for Oct-Dec bounce
- Small-caps look close to breaking back out vs Large-caps on ratio charts.
- Bitcoin’s minor pullback looks nearly complete and might rally along with Stocks.
The drawdown in SPX neared September lows to kick off the new week, while NASDAQ officially did break down to new 2022 lows before its late rally. Does this mean “all bets are off” for an October bounce? Absolutely not. Treasury yields look to have an excellent chance of stalling near prior peaks and rolling over. Furthermore, positive divergences in momentum are now present coinciding with a plethora of DeMark-based exhaustion signals that should likely bring about a larger-than-expected trading bounce between Tuesday/Wednesday of this week. Breadth has been “less bad” on this recent downdraft than was seen last Monday/Tuesday on the rally. In addition, various groups like Healthcare, Financials, and Discretionary are holding up better than expected. Semiconductor ETF’s plunging to new lows, is a near-term problem for market bulls, of course, but downside here looks limited. Overall, with regards to QQQ 0.10% , I’m not expecting a move down under 260, while a bounce looks probable which will help prices regain 280 and challenge October peaks near 284. No change in thinking. This dip should be bought.
Performance data shows some interesting patterns of resiliency despite market decline
While most feel the market has literally gone “straight down” lately, a quick look at 1-week performance data of the larger SPDR S&P ETF’s and Equal-weighted ETF”s tells a bit of a different story.
While the large cap dominated SPDR ETF’s have underperformed within many groups, the Equal-weighted versions of Consumer Discretionary and also Financials, and Industrials have fared much better. I noted two weeks ago that Discretionary had been outperforming Staples on a 1-week and 1-month basis.
Technology’s decline has certainly been a true headwind for progress. Yet, Tech has outperformed both Utilities and REITS over the last week as well as the last month. Some interesting rotation continues to be ongoing, without a doubt. Taking some time to watch Equal-weighted performance seems important given the continued large-cap bias of many big capitalization stocks within SPX.
Given the presence of counter-trend exhaustion signals appearing on Treasury Yields, the US Dollar, Equities, along with some evidence of cycles turning up early this week amidst a very pessimistic sentiment landscape, it wouldn’t be surprising whatsoever to witness a strong bounce over the next couple weeks. Momentum and breadth are decidedly “less bad” than early last week, and some of this performance data makes it right to consider betting against the trend for those who believe in buying dips into oversold territory in October.
Small-caps have started to stabilize vs. Large-caps
Interestingly enough, Small-caps have largely been basing vs. Large-Caps all year long in relative terms which argues for watching carefully for any evidence of a coming breakout.
This consolidation largely began as Large-cap growth began to fall out of favor this past January 2022. Ratio charts of Russell 2000 ETF (IWM -0.66% ) vs. the S&P 500 ETF (SPY 0.12% ) show a pattern of low, lower low and a higher low which has become more apparent in recent weeks.
While a breakout of this horizontal green resistance trendline will be necessary before weighing in on upward acceleration, it clearly looks like IWM might be the best way to play a bounce between now and year-end and could very well outperform both QQQ 0.10% and SPY 0.12% . Stay tuned.
Bitcoin should be nearing trading lows this week
Bitcoin’s pullback over the last week looks to have directly coincided with a similar decline in US Stocks. However, it’s important to point out that the correlation seems to be less positive than was the case a month ago and Cryptocurrencies have largely managed to hold their value despite the broader decline in risk assets continuing. As seen below, BTCUSD remains well above its September and June lows and has had a mild uptrend at work since mid-September (which is opposite to what’s happened in US stocks) Overall, I’m expecting that prices are nearing support and 19,000 should hold on this recent drawdown. Rallies back to $20,447 look likely over the next couple weeks and the ability to exceed this would allow for a much larger advance up to near $22,781. At present, BTCUSD remains near-term range-bound within its two-month downtrend, but prices are getting near an area of appealing risk/reward support.
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