Broadening out in US Equities looks to have begun

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US Equity markets look to be bottoming in the historic “bear-market killer” month of October following oversold conditions during a time of seasonal tailwinds and bearish sentiment.  The effect of the attack on Israel resulting in Treasury yields and the US Dollar rolling over looks important and Equities are responding to this more than the anticipated Israeli retaliation.  SPX having exceeded 4336 should lead prices higher in October.

A big day for market breadth as NYSE came close to showing it’s first “90% Up Day”, but volume managed to favor advancing issues by more than 82%.   This is a welcome development at a time when many investors were publicly questioning whether the broader market might be able to snap back and join the strength in Technology, or vice-versa.

Overall, SPX and QQQ arguably are likely to continue higher at a time when the Dollar and Yields have begun to turn down in earnest.  This is a key bullish factor for “why” equities can rally in the wake of the multiple geopolitical conflicts during a time of ongoing uncertainty on the economy and FOMC policy.

I’ve discussed the resilience in Technology having been an important factor for why SPX and QQQ were able to hold up relatively well in recent weeks despite the outflows and technical deterioration, which was seen in sectors like Consumer Discretionary, Consumer Staples, Utilities, Healthcare and others.

Yet an important short-term development over the past two trading days concerns the degree of improvement in many of the beaten-down sectors which had neared prior lows.  Simply put, when markets get oversold and near support, then engineer a very favorable breadth reading (Just shy of 90% off the lows) with wide-spread participation in areas like Transportation, Retail, Regional Banks, and Small-caps, it’s tough to see it any other way than bullish. 

Many had feared that Technology would begin to turn down and join the weakness being seen in some of these other sectors.  Now it appears like it’s the laggards that are starting to play catch-up.  This should be an encouraging development for market breadth, and volume coupled with the many trendline breakouts across sectors seems to suggest Tuesday’s rally has importance.

Near-term resistance might materialize initially near the following SPX resistance zones:

SPX-4390-4401, 4433-63, and then 4530, which lines up near an existing downtrend from July along with being a Gann-based area of resistance from the 10/3/23 low close of SPX-4264.75.

Support lies near 4300 and shouldn’t be tested right away, in my view, as this rally likely shows additional upside follow-through.  As shown below, SPX has successfully reclaimed 4336, which tilts the odds of this entire formation since late July being a simple Elliott-wave style ABC formation which can lift prices back to test and exceed July highs.

Regional Banks breakout is certainly not being discussed

The rally back in Regional Banks is certainly a welcome development to those that follow Financials.  This sub-industry has broken out above absolute downtrends as well as relatively speaking vs. the Equal-weighted Financials space, which bodes well for KRE to show some near-term outperformance.

Regional Banks are among the worst S&P GICS Level 3 groups in Year-to-Date performance, lower by -38.36% through 10/10/23, (this is compared to the S&P Banks Index (S5BANKX- Bloomberg) which is down -12.14% YTD, (third worst performing S&P Level 2 group out of 24 YTD)).

However, the S&P Regional Banks index (S5RBNK- Bloomberg) showed performance of +3.33% in Tuesday’s trading, putting this ahead of all but 1 group out of 158 that make up the SPX for one-day returns.

Daily Symbolik charts show some of my reason for optimism.  S&P Regional Banking ETF, KRE -0.45% , broke out of its 2.5 month downtrend from late July as of Tuesday’s (10/10) close.

This is quite bullish for KRE in the short run, and should help this make upside progress in the days/weeks ahead.

Small-caps also making historic strides as IWM -0.71%  breaks out above its one-month downtrend

Small-caps are also beginning to participate in this advance after having successfully bottomed technically speaking, right near former lows followed by a breakout (similar to KRE -0.45% , and similar to FXI 2.79%  and DJT) of the downtrend since early September.

This is encouraging for Small-caps which have been overdue to start some kind of counter-trend rally, and this looks to be getting underway this week.

While IWM has some “work to do” in order to regain its larger area of trendline resistance, near $180, Tuesday’s gains look like a positive development, and can help this follow-through further in the month of October.

Pullbacks, if/when they occur should likely find strong support near $170 on any weakness, before pushing up to $180-1 which lies near trendline resistance along with prior August lows (Former support should now become resistance on retests, technically speaking).

Above $181 would signal a good likelihood of a rally back to challenge and exceed late July peaks.  While this is not expected right away, it would be much more likely if/when IWM can get above $181, and would likely have a very positive impact on weekly and monthly momentum.

US Dollar finally breaks its uptrend from July

US Dollar index (DXY) has finally broken its uptrend from July, which has been discussed in my Daily Technical Outlook several times in the past month.

While DXY did in fact get briefly above my former $106 target, this proved short-lived, and this week’s decline arguably should put a 3-5 month decline in motion in the DXY.

2023 targets could materialize near 103.50 down to 102.60, which will likely take some time to reach.  However, a break of $102.60 points to a good likelihood of an eventual challenge and break of 2023 lows.

Counter-trend TD Buy Setups are now present in both EURUSD and also GBPUSD which gives some added conviction that the DXY is peaking out.

Finally, while some Elliott-wave counts suggest that pullbacks into 2024 likely reverse and lead back to new quarterly highs, exceeding the peak from early October, it’s early to make a bold forecast of the sort.

At present, my cycle composites and sentiment seem to suggest Dollar weakness into year-end.  This is now confirmed trend-wise, by a break of the uptrend in DXY which had been established at the July bottom.

Note, since Equity indices peaked out in late July right after the US Dollar bottomed, keeping a close eye on DXY makes sense for the weeks and months ahead, as the correlation doesn’t appear too much different than with SPX and TNX.