Short-term US Equity trends are bullish and likely begin to accelerate higher into mid-October before finding much resistance. Despite the bearish seasonality trends, it’s hard to be too negative on recent price action, which combined with rising momentum and above-average bullish breadth, necessitates a bullish stance into October. (While Banks, Biotech, and Small, Mid-caps have been under pressure, Chinese Equities, Industrials, Materials and most importantly, Technology have rallied back sharply.) Moreover, triangle patterns have been exceeded to the upside for SPX, and DJIA, and it’s thought that NASDAQ and Russell 2000 should eventually join in on this strength. Following the Fed’s first interest rate cut in over four years, precious metals look to be showing parabolic strength while both the US Dollar and US Treasury yields start to stabilize. Overall, without evidence of any serious technical damage, it’s difficult turning too negative on US equity markets.
Last Thursday’s surge was truly the day that set the tone for how the next 3-5 weeks could play out. Despite some choppiness since last Thursday’s SPX breakout, SPX remains just 6 points above where SPX closed back on 9/19, trends and momentum have improved over the last week, and markets have proven resilience during a seasonal period that was widely thought by most Financial media to be negative.
However, there’s been some interesting price action happening “Under the hood” so to speak in risk assets. Bond yields have risen nearly 18 bps since FOMC’s 50 b.p. rate cut. The US Dollar has stabilized. Technology has managed a very impressive rebound in the last week. (While XLK -0.10% remains lower over the last one-month, the Equal-weighted Technology ETF (RSPT 0.46% ) has been the best performing of any of the 11 Equal-weighted ETFs that make up the US stock market on a rolling 1-week basis.)
Healthcare, however, has underperformed, and stocks like REGN -1.36% , MRNA -2.95% , AMGN -1.11% , and MCK -0.07% are all down more than 6% in the last week. Given Healthcare’s weighting within SPX, that hasn’t been a helpful sign for this past week. The Biotechnology rally in particular looks to have failed, yet again, prior to an impending breakout. Finally, Small, and Mid-cap Stocks have largely been under pressure in the last few days. Regional Banks have also not been acting well, as KRE 0.44% has fallen for the last four trading sessions.
Thus, some of this small-cap underperformance could be attributed to why XBI and KRE have lagged this week. However, most of these underlying sub-sector developments have not been a “net negative” for the stock market. Forces like China coming back along with Materials and Industrials stocks outperforming, have largely served to buoy US equities, despite some underlying weakness within a few sub-sectors.
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