Lots of reasons to suspect 4Q of 2022 might turn out like 1962

Friday’s about-face seemed impressive after just a minor pullback late week. Yet a few negatives remain present that will need to be resolved before projecting higher into December.  First, negative divergence remains between the NASDAQ and SPX (See NASDAQ below) as prices remain under early October highs.   Second, DeMark indicators are now showing confluence of 60, 120 min and Daily TD Sell Setups which argue for a stall out.  Third, Treasury yields look to have found initial support on pullbacks and haven’t yet confirmed a major breakdown.  Fourth, short-term Elliott patterns still look to be nearing a conclusion after this runup.  Finally, the NY FANG index broke to new lows for the year vs SPX this week.  However, in the bigger scheme of things, I’m impressed with the degree of resilience in this market and cycles show a good likelihood that 2022 could resemble 1962, which rallied up sharply in Q4.  Overall, I suspect that early next week should be important for a pullback if we’re going to get it.  Bottom line, dips should be buyable and I expect that the trajectory for the next two months should be positive, despite an above-average likelihood of a short-term pullback.

2022.  Is this 1962 all over again?

Thus fare, 2022 has shown a curious resemblance to 1962.  Both years showed a sharp decline into mid to late June to mark lows of the Summer followed by a mild bounce.  Then, both years have brought about a retest into October before rallying off October lows.  In 1962’s case, that mid-term Election year showed strong outperformance into year-end.

While the verdict’s still out on whether November and December can live up to the billing of how robust Q4 in 1962 was, it’s a stern reminder to always pay attention to the 60-year historical cycle, as tends to have had quite a track record for any given year as to possible trajectory.

The famous trader/investor W.D. Gann wrote in books 100 years ago that he considered the 60-year cycle his “Master Time Factor” presumably from its tendency to show a strong resemblance to the year at hand.  This is largely based on three cycles of 20 years.  While a 20-year cycle doesn’t always repeat the same way, the 60-year can often be quite accurate.

While other cycles are definitely important in how broader indices move during any given year and many factors are key, it’s important to give this period 60-years ago some attention when looking forward to any given year.

Small-caps vs QQQ likely to rise to test its long-term downtrend

Last night I showed the near-term breakout in relative charts of IWM-0.49%  vs QQQ-0.58% , which had exceeded a six-year downtrend.  This looked important as to a reason why Small-caps might outperform into year-end.   However, when looking further at the long-term trends of this important ratio, we see that since 2005, the long-term trend in Small-caps when specifically compared to QQQ-0.58% , has been down.

Thus, while the short-term breakout is quite relevant, it’s also proper to view this through a different lens to understand the bigger picture.  Furthermore, this illustrates why QQQ has been such a strong outperformer over the years (QQQ-0.58%  relative strength relative to IWM-0.49%  would make this ratio fall, which it has dramatically over the last 15 years )

Importantly, the DeMark monthly counts on IWM vs QQQ shows a current 8 count per its TD Sell Setup.  Thus, over the next 1-2 months, one could suspect this recent outperformance in IWM very well could hit strong resistance, right as the longer-term downtrend is tested.

Overall, I like IWM here relative to QQQ.  However, I’m expecting that this recent surge likely has a more serious test as of end of year as to whether this outperformance can continue.  Breakouts of the long-term downtrend aren’t expected, but would produce a meaningful intermediate-term buy signal for Small-cap outperformance.

Performance shows broad-based strength which should make any decline likely temporary

While many are focused on the current downtrend from August in S&P Futures, and those with a more pessimistic attitude have resorted to calling our recent bounce “Nothing more than short-covering” it’s necessary to put this recent bounce into perspective.

“Looking under the hood” so to speak, tells a bit of a different story as to what’s been participating and gives some reasons for optimism as to why markets might be able to extend further in the months ahead, despite negative earnings revisions, and/or economic weakness.

As shown below, Industrials have been “hands-down” the best performing sector, rallying more than 7% in the last week.  Moreover, other sectors like Financials, Healthcare and Energy have also shown strong relative strength, handily outperforming the S&P 500.

One key reason for all this sudden outperformance has to do with the outsized presence of AAPL, GOOGL, MSFT and META within some of these indices.

As can be seen, equal-weighted Technology has trounced XLK0.44%  by nearly 300 bps in the last week.  Thus, Tech has not fared nearly as bad as what XLK might suggest.

I shared Healthcare’s charts last night with its absolute and relative breakout, and other groups like Industrials and Energy have also been strengthening sharply of late.  I view the Equal-weighted outperformance as being far stronger than SPX alone, and feel that this is a bullish factor given the camouflaging of “Big Tech” within the indices.  Overall, minor weakness into next week likely should provide buying opportunities, not only based on sentiment, bullish mid-term seasonality, but also given such strong performance by many sectors.