Short-term trends look to be “back on track” after SPX pushed back to new all-time high territory following two failed breakout attempts earlier in the week. NASDAQ also managed to push to new monthly highs and market breadth added some conviction to this move with very positive bullish Advance/Decline data. Overall, a continued rally would certainly go against the negative seasonality trends for late September but would make sense given ongoing bullish technical structure for US indices, positive and rising breadth and momentum, and an overall lack of ebullient sentiment. Interestingly enough, both US Dollar and US Treasury yields look to be stabilizing and might be starting to turn higher in the weeks to come for a bounce. Overall, without evidence of any serious technical damage, it’s difficult to turn too negative on US equity markets. Most of the Triangle patterns for SPX, QQQ, IWM look to be slowly but surely resolving higher to join the DJIA’s breakout and that of Equal-weighted S&P 500.
Overall, yesterday’s comments on Treasuries look to be playing out, while the Equity market weakness looks to be premature given Thursday’s rally. Specifically, the move back to new all-time highs for SPX and to new monthly highs for NASDAQ look bullish given the broad-based participation and likely mean that efforts to slow down this trend still might prove difficult despite late September being a tricky time for the Equity market.
Given that most of the technical factors I lean on outside of cycles/seasonality remain bullish, and sector participation still shows excellent strength in most sectors with sentiment also not being as bullish as needed for a peak, further strength looks likely into mid-October potentially.
This would gel with the SPX daily cycle composite I showed in the Tuesday evening report (9/17/24) and also might allow the weekly SPX exhaustion data per DeMark indicators to grow a bit closer to producing warning signals (which at present, are not in place).
This SPY chart by Symbolik below shows that this exhaustion counts are also still premature on daily charts which had been present at the former peaks in both July and mid-August. In this case, readings of 8, and 10, respectively necessitate another 3-5 days at a minimum before any actionable signal would be in place. Furthermore, the weekly signals on SPY, SPX, QQQ are roughly 3-4 weeks from completion.
Thus, this breakout from the triangle pattern for SPX and SPY looks to have happened today, and breadth data coming in strongly positive would seem to confirm that any real consolidation remains premature. I’ll monitor this closely as the days progress but am inclined to think that Thursday’s breakout could extend even higher. SPX targets arguably lie between 5815-5835.
S&P 500 SPDR-SPY
Despite Fed having cut 50 basis points, Wednesday’s FOMC rate reduction still registers as a surprise compared to expectations
Given that the Swaps market had registered a 40.5 bp cut probability which lies between 25 and 50, it was likely that markets would experience some volatility regardless of the Fed cutting either 25, or 50 bps.
The bond market sold off sharply with stocks. However, the stock rebound lifted prices right back to the highs on Thursday.
So, the question remains whether the Fed’s lack of dovishness at the press conference was sufficient to result in rates starting to back up more meaningfully as Powell failed to address the number of rate cuts currently in the curve.
While volatility is certainly possible in the weeks to come, I initially expect Thursday’s rally to extend a bit more before any real slowdown. Volatility, if/when this occurs, might be postponed until post-October expiration into the US Election.
This postponement would gel with bullish technical chart structure, cycle composite projections, lack of weekly DeMark exhaustion, and constructive sector participation.
However, this table is just a reminder that despite being a 50 b.p. cut, it did seem like the largest “miss” compared to expectations since the Global Financial Crisis (GFC), and 2022-2023 bear market. A 25 b.p. cut “only” would arguably have served as an even larger miss vs. expectations.
FOMC Rates
Biotechnology ETF looks ripe for technical breakout
Biotechnology looks attractive technically following the much-anticipated FOMC rate cut this week, as the sector has been slowly but surely gaining strength in recent weeks.
This group was cited by Tom Lee in his research recently on sectors that show relative outperformance following a first Fed rate cut (outside of recessions)
The forward returns historically on Biotech in the forward 3-month and 6-month periods following the first rate cut have shown a strong relative return of +17.4% and +38.9% respectively when looking back at average performance since 1971 (this Study looked at 1971, 1984, 1989, 1995, 1998, and 2019).
Technically this pattern is quite attractive as XBI, (the SPDR Series Trust S&P Biotech ETF) has been basing since February of this year. Any weekly close back above $103 should allow XBI to trend up to $118.65, and potentially $132.
Pullbacks into the US Election, if/when this occurs, should offer an even better risk/reward opportunity near support levels at $100.
At present, Biotech looks very appealing for outperformance in the weeks and months to come given the start of the Fed’s rate-cutting cycle combined with a favorable risk/reward technical setup.
SPDR Series Trust – SPDR S&P Biotech ETF
Utilities might be close to stalling out as Defensive groups underperform sharply on Thursday’s SPX breakout
Utilities along with REITS and Consumer Staples all showed severe underperformance on Thursday as SPX pushed back to new all-time highs.
Normally, it’s my experience that when defensive groups lag performance as a group on an index breakout, this kind of underperformance very well might continue.
XLU recently broke out to new weekly and monthly all-time highs as of the end of August. However, it has failed to make much progress and largely lies near the same level as its former peak from 2022.
Overall, I suspect that the Defensive groups could be prone towards underperforming into mid-October given a combination of both rising Treasury yields and a more broad-based equity rally which might witness flows out of the Defensives.
While Utilities have proven to be an Outperformer this year, I view this group as Technically neutral given the ongoing intermediate-term downward trend in Utilities vs. SPX in relative terms.
Given the start of a possible stall-out in rate sensitive groups this week and Utilities just slightly above former all-time highs, I’m skeptical that it’s right to favor Utilities with Technology suddenly back in favor. I’ll need to await further evidence of this sector reverting more to have a negative technical bias, and still believe that an AI focus could allow this sector to perform in line with SPX even on a market rally. However, the risk/reward for Utilities does not seem as favorable at current levels with Treasury yields having begun to turn higher.
SPDR Select Fund – Utilities
