US Equity markets are in the process of bottoming out after having entered the “Bear Killer” month of October following oversold conditions during a time of seasonal tailwinds and bearish sentiment. Yields and US Dollar should also be on the verge of rolling over. While a bit more upward progress is needed to confirm this Equity rally, markets look very close, and any backing and filling next week would make Equities an attractive risk/reward
Are the Lows In? or Not?
Equity indices managed to show a very sharp reversal Friday which lifted prices right up to the key “Do-Or-Die’ heading into Friday’s close. A couple pertinent points:
Despite the urge to jump onboard this rally, SPX and QQQ require more Technical proof to say with certainty that any meaningful low is in place. While I expected a rally to commence in this timeframe and listed a number of positive technical data points in recent days to back this up, the following issues need to be resolved, in my view to have greater conviction of a low.
- Wave structure of this bounce remains corrective, and only three waves down have happened in QQQ from early September. Friday’s bounce appears like a C-wave of an ABC which could be resolved by a final pullback into next week, with ideal targets at 348-349. Areas where this would be wrong lie at QQQ-367
- Breadth was not tremendously positive for a reversal off the lows, and NYSE data shows just 2/1 positive ratio of NYSE Advance/Declines with a similar dispersion with volume
- Treasury yields have not broken down meaningfully from peaks. While yields did fade from earlier highs, there hasn’t been the necessary trend break to think peaks are in.
- DeMark signals have not been triggered for SPY, nor QQQ 0.80% .
- It’s likely important for groups like Transportation, Regional Banks and Small-Caps to all begin rising off recent lows and breaking their respective downtrends to have confidence of a broad-based rally, and not just a bounce in Technology. This hasn’t yet happened.
Overall, I feel this is a very tricky spot. As discussed yesterday there remain more than eight technical reasons to thinking a low should occur between now and late next week, and the breadth readings along with sentiment could certainly support a meaningful bounce which might last throughout October. (For those seeking these Positive reasons, kindly review this week’s notes.)
However, for those seeking to switch their exposure to more bullish at this juncture, it’s worth relaying that prices need to eclipse SPX-4335 and QQQ requires a move back over 369.14 which was hit on an intra-day basis on 9/7/23, marking the end of Wave 1 lower from early September.
One could deduct from a risk/reward basis that speculators might have a 3/1 risk/reward on shorts between now and next Thursday, given Stop-out levels for shorts compared to downside targets which would help to fulfill wave structure and Downside exhaustion concerns.
Given that political turmoil has grown more chaotic in Washington while CPI awaits next week right at the anniversary of last year’s lows, the cyclical timeframe of 10/11-10/13 makes more sense to me, than 10/3, as to what would be viewed as a serious low.
Yet, prices are near key resistance from late September as well as mid-August. This level can’t be exceeded without thinking markets will extend meaningfully in my view. Thus, the “Moment of Truth” is approaching. Given that Equities ignored Friday’s push higher in Yields and both went higher, Friday was certainly quite unusual compared to recent trading history. One can’t say with conviction that this correlation is unwinding based on one day’s trading.
Overall, I am quite constructive on the prospects for a positive October for US Equities. My concern is with the next 3-5 trading days, and if these current issues I’ve listed above are relieved by sufficient strength, I’m very happy to jump onboard knowing that prices failed to meet my ultimate objective. As of Friday’s close, I’m not quite ready to take a victory lap.
Staples have broken down to multi-year lows
The recent underperformance in Staples has been mindboggling as RHS, the Invesco Equal-weighted Staples ETF, has dropped to the lowest levels since late 2020, nearly four years ago.
CLX -7.24% , K -0.01% , KVUE -2.31% , HSY -5.37% , SJM -1.14% , MKC -1.47% , WBA 0.52% , EL -16.26% , and DLTR 3.76% have all lost more than 20% just in the last three -month period, as of 10/6/23’s close.
On a weekly basis, this looks like a giant breakdown of a pattern that had been building for years. While an oversold rally is likely a couple weeks away from getting underway for this group, until it can recoup prior lows, it makes sense to avoid the Staples given structural concerns.
Those who are suspecting that SPX needs to revisit 4100 or below should take note that Staples as a defensive group shouldn’t be showing the same magnitude of loss when other sectors like Technology have been positive over the last week, while the NASDAQ Composite recorded a positive week. It’s not a stretch to say the growth in Jobs doesn’t seem to be translating into optimism for consumer spending given these recent losses, in my personal view.
DeMark-based weekly exhaustion signals might be present within the next 1-2 weeks, but is worth waiting for confirmation for those seeking to buy into the Consumer Staples sector. Selectivity remains essential for those considering this group.
Consumer Discretionary just broke out again vs. Staples
Given the extent of recent weakness, it might not be surprising to expect that many sectors are trending up sharply relative to Consumer Staples when viewing relative charts of various sectors in ratio form.
However, it’s interesting that Consumer Discretionary has broken out to the highest levels in more than one year vs. Consumer Staples, which normally happens during “risk-on” type environments, not times when stock indices are falling.
As the left-hand side of this chart shows, the steep decline in Discretionary vs. Staples happened in 2022, during last year’s bear market. While many suspect that this year is equally as negative in many ways, it’s turned out to be the opposite with regards to Discretionary vs. Staples.
This breakout in the ratio of Equal-weighted Discretionary vs. Equal-weighted Staples shown below (RCD vs. RHS) looks to show further upside in October and should be overweighted. Despite one’s thoughts on the broader market, I expect Discretionary to sharply outperform Staples, which fits into my thinking of a positive October, performance-wise for SPX.
QQQ still has some “work to do”
This hourly QQQ chart shows why it might still be premature to “Take a Victory lap” in celebrating Friday’s rally.
This hourly chart shows price history from early September, and appears to very clearly illustrate a three-wave decline only into this week, followed by a choppy bounce which appears like a corrective move.
If/when QQQ exceeds $369, it will be right to give this rally the benefit of the doubt. However, with CPI next week being an important economic data point, it can’t be ruled out that the upside from $364 to resistance at $369 is not too substantial. This means that prices very well could be near resistance, while a move back down to test lows would help to create that five-wave decline from September which would make for a much stronger case for a trading low.
Overall, I’ll accept either outcome, but believe that QQQ lies at a tough spot following Friday’s rally. If price exceeds $369, then it’s right to trust this move.
IF price fails and undercuts $360, then a decline down to $348 would be probable. This would then result in fear growing to capitulatory levels that would make embracing this market far easier for a sharp rally into late October.
At present, while I’m encouraged that Friday’s bounce will make momentum start to turn higher in a way that any future decline likely produces positive divergence and makes QQQ even more attractive, I find it difficult to call for immediate upside follow-through just yet.
The next week will shed a lot of light as to the prospects for the balance of October. I stand as an October bull, yet with some minor concerns about the week ahead. Either declines to new lows, or a breakout above $368 would both make me feel that QQQ is attractive for different reasons.
