Friday the 13th Reversal should prove short-lived into next week

US Equity markets look to have bottomed on 10/3 and are likely to progress off October lows in a two-steps forward, one step backwards type process.  Both US Dollar along with Treasury yields are likely to show further deterioration in October, but also could show some backing and filling in the near-term into next week.  The expansion in breadth and broad-based nature of many lagging sectors coupled with bearish sentiment remain reasons to be constructive for October.  Furthermore, QQQ relative strength as the new “safe” sector combined with bullish seasonal trends should make October more bullish than November.    

Overall, nothing has changed in the short-term technical outlook despite the late week reversal.  This directly followed S&P futures having climbed up above 4400 while QQQ stalled near strong resistance just under $374.

Interestingly enough but not surprising, S&P’s early reversal following Friday morning gains proved to directly coincide with TNX finding initial support near 4.59% and turning back higher.  As many remember from Thursday’s session, the area near 4.70% proved to be resistance for yields.

Overall, while a minor bounce attempt over 4.70 could happen early next week which might directly line up with yet another selloff attempt for SPX and QQQ.  However, I expect any weakness early next week to prove minor and short-lived before turning back higher.

Ideal support found near S&P Futures near 4330 while SPX cash support should arise between 4282-4300.  QQQ has support near 363.  For sake of simplicity, I’ll use SPX cash index daily charts to illustrate the current pattern below.

It’s difficult just yet to think this pullback has run its course.  However, I remain bullish and feel SPX is much more attractive down at current levels and would be even more so near 4300.  A couple relevant points to reiterate into end of week:

• Technology remains quite strong, technically speaking, despite Friday’s underperformance.  This should provide entry points into Technology next week given the stellar structure and relative uptrends vs. S&P.

• Fear has been on the rise given the rapid uptick in geopolitical violence.  VIX spiked much more on Friday than ordinarily might have been the case on a -0.50% decline.  Backwardation remains intact for most of 2023 futures.  However, any rise in October futures over November would be seen as a possible short-term peak for VIX next week.

• Elliott-wave structure remains constructive, and looks to be mid-way through its pullback from Thursday’s (10/12) highs.  I anticipate an Equity bottom next week followed by a push back to highs.

• The numerous breakouts which happened across many laggard sectors this past week shouldn’t be completely erased.   Regional banks, Transportation stocks, and Small-caps are likely to be near support after the weakness from Thursday and Friday this past week.

Treasury yields are gradually peaking out, and any lift in yields early next week should prove temporary

Treasury yield patterns on TNX look similar but opposite to SPX.  Yesterday’s firm resistance near 4.70% resulted in an early backing off in yields Friday morning.

That weakness directly coincided with Equities showing some early rally attempts into Europe’s close.  However, the reversal intra-day also coincided with TNX bottoming at 4.588% and attempting to turn back higher.

If this pattern continues into next week, it could allow for a bit more bounce, as SPX completes its downside pattern.

However, my view is that both Treasuries and Equities are likely to rise through the balance of October, and this should begin next week.  Thus, minor bounce attempts in TNX should be nearly complete.  Similarly, any near-term SPX weakness is not likely to prove long-lasting before reversing back higher.

Gold is arguably breaking out after sharp gains off the lows this past week

Gold began to turn back higher this past week directly coinciding with US Dollar and Treasury yield weakness along with heightened geopolitical concerns.

I feel this continues in the months ahead and any move back over 1950 should lead to a quick rally back to test and exceed May 2023 peaks.

Spot Gold finished at 1932.82, higher by more than 3.42% on Friday.  Silver showed even stronger performance and closed higher by over 4%.

These precious metals gains are happening exactly as the Israel/Hamas war began this past week, and also coincide with a very low level of Managed Money positioning as CFTC data detailed this past week.  Thus, bearish sentiment coupled with rates and Dollar falling during times of war normally result in outperformance from the Metals.

I am bullish on both Gold and Silver over the next few months for further gains back to new highs into early 2024.  Gold and Silver mining stocks are likely to show outperformance.

Medical Devices ETF has just broken down under October 2022 lows

Medical Devices has just violated last year’s October lows which brings this to the lowest levels since mid-2020 over three years ago.

ETF’s for this group, represented by IHI 0.59% , the Ishares US Medical Devices ETF, have declined more than 20% just since mid-July, less than three months ago.

While many might feel tempted to buy weakness following IHI officially reaching weekly oversold levels, with RSI having plummeted to under 28, it’s important to wait for some semblance of stabilization, and/or DeMark signals showing downside exhaustion.

At present, neither one of these is yet in place, and this week’s decline has just violated prominent lows that were made last October, which is thought to be a bearish development.

While some minor support might develop at $43-$43.25, it’s likely better to await $41-$41.50 which lines up with a monthly TDST line for IHI along with this lengthy arithmetic trendline.

Some of the hardest hit stocks include AXGN 1.81% , NVCR 2.89% , BFLY 7.22% , PODD 0.87% , INSP 2.07% , SILK 2.70%  which have all declined more than 50% in the past three months.  These stocks are difficult to consider attractive on this weakness.

The stocks that look more appealing, in my view, are BDX 1.13% , ISRG 0.13% , STE, SYK, and BSX -0.49% , which are some of the best technical names within the 55 members that make up IHI.  While I feel these are appealing technically, it’s important for IHI to find support which has declined 11 over the last 13 weeks, and has just violated support this week.

In my view, by mid-November, this group should be quite appealing, and likely can benefit as more evidence is apparent of Treasury yields rolling over more sharply.  Investors should be patient with this sub-industry of Healthcare, and look to expect IHI to potentially bottom out by November near $41-$41.50.