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 NASDAQ has begun to claw back quickly given Semiconductor stock strength, and now lies within striking distance of its own all-time highs. Overall, without evidence of any serious technical damage, it’s difficult turning too negative on US equity markets.
Reasons for Optimism:
- Technical structure- S&P and DJIA recently broke out of triangle patterns and have trended higher following their move to new all-time high territory.
- Momentum has turned more positive- MACD is positive on a daily, weekly (as of this week) and monthly basis, while RSI is not overbought.
- Breadth has improved in recent weeks – Percentage of SPX names above their 200-day moving average is now close to 80%. While short-term breadth has tailed off a bit in the last two weeks, longer-term breadth remains quite constructive.
- Sentiment has still not reached complacent and/or speculative territory that normally would be associated with a market top.
- Short-term S&P Cycles show positive slope into October expiration before some consolidation into the month of November.
- Technology snapback- Technology, which represents S&P’s largest sector weighting by percentage, has rallied back sharply at a time when many had written this sector off. Key stocks within SPX and QQQ like AAPL, NVDA, META all show very constructive technical charts which make it difficult to avoid these stocks, and by extension, to avoid the market. Heading into Friday, Tech still had the best performance of any one of the Equal-weighted sectors for the past week, ahead of Materials, Discretionary and Industrials.
- China stimulus- The rally in Chinese Equities has been a positive influence towards many US Sectors this past week, helping Materials stocks as well as Airlines within Transportation, and Casino names within Consumer Discretionary. It’s not wrong to say that China strength has indirectly helped to jumpstart a few of the US sectors that had been lagging and started to rise quickly just at a time when FXI began its sharp rally.
Overall, heading into Q4 in the next week, S&P is set to potentially record the best Election year performance since 1996, which returned +23.1%. If this is surpassed, that would represent the best performance since 1980, which returned +32.4%. While some type of consolidation very well could unfold during late October, many of the warning signs that normally coincide with bigger stock market corrections just aren’t present at this time.
Dow Jones Transportation Average looks to be gearing up for a Breakout following a year of underperformance
One of the interesting pockets of strength which followed the recent China stimulus happened to the Airline sector which showed sharp gains over the past week.
This allowed the DJ Transportation Average to close at the highest levels since March 2024, six months ago. Transportation was one of the top-performing sub-sectors within the 25 groups that make up the S&P 500 GICS Level 2 groups over the past week.
Thus, following a period of sub-par performance in year-to-date terms (Transportation has been higher by merely +3.92% this year, one of the worst performing of the Level 2 sectors) some sharp gains in this sector are seen as a technical positive.
As shown below, this giant triangle pattern which was observed in the S&P is also present in the Transports, albeit in a larger pattern.
This area within Industrials looks ripe for mean reversion and it’s important to watch for evidence of the Transportation Average closing above $16,500 on a weekly close which should constitute a breakout of this pattern. (Note, July 2023 highs were $16707.66, but the breakout likely would happen after a move above $16,500 in the weeks to come.)
This should be a necessary rotation that follows the comeback in Discretionary and Materials as China makes its own comeback.
Moving back to new all-time highs would also help to erase some of the intra-market divergence which is important with regards to Dow Theory, as the market tends to be healthier when Transports confirm the movement seen in the Industrials.
The railroad stocks thus far lagged the Airlines this past week, but this group is well positioned to start to strengthen in the weeks ahead. I’ll discuss some of my favorite Transportation Stocks next week as they start to show evidence of strengthening. At present, keeping a close eye on the Transports is important at this stage in the US Stock market.
Dow Jones Transportation Average Index
Performance over the last week shows the extent of the Technology comeback along with strong Materials and Discretionary strength
The rapid “back-and-forth” of sector rotation this past week has shed some light on a few new developments that merit discussion:
- Technology has snapped back with a vengeance following a time when many suspected it could be vulnerable in September. While Large-cap Technology lagged a bit this past week, Equal-weighted Technology turned in the best performance of any of the 11 Equal-weighted S&P 500 ETF’s (per Invesco).
- Materials, Industrials and more recently, Consumer Discretionary have all started to rally back. This looks to be important given the lagging in both Discretionary and Materials this year.
- Defensive sectors like Real Estate, Consumer Staples and Healthcare all began to weaken.
Thus, there’s been some fairly large changes on a one-week basis, and it’s important to watch for multiple weeks of performance to see whether this can continue. The key takeaway, however, is that this rotation is a positive, not a negative (except for Healthcare).
Invesco S&P 500 Equal Weight ETFs
Casinos have rocketed back following China’s Equity rally.
This week’s outperformance in Discretionary has to some extent been fueled by gaming stocks as 3 of the top 10 best performers of the last week have come from Casinos: WYNN, LVS, and MGM. (The results from WYNN and LVS are staggering, as these have gained more than 20% over the last five trading sessions.)
While some retail stocks have also rallied back along with TSLA, many of the stocks that have rallied are tied to China in some shape or fashion.
As seen below, the S&P Casinos and Gaming GICS Level 4 index has rallied up to test the area of its one-year downtrend from last Summer.
This is an important technical level to watch and many of the top Casino stocks like WYNN and LVS have similar structure as this index.
The ability to surpass this area would help Casino stocks enjoy an even larger intermediate-term rally which might last into next Spring.
At present, it’s wise just to watch this area, and I anticipate that Casino stocks should slow down in the short run following such a large rally.
SSCASI Index
China rally could extend 15-20% into next Spring- Here’s the critical resistance level to watch
The surge this past week in China has proven quite dramatic following its failed attempts earlier this year and has formed “Breakaway gaps” on high volume that normally can lead much higher on an intermediate-term basis.
In the short run, I do not feel that this rally has exhausted itself and one can make the case for further upside to $33.85-$34.50.
However, on an intermediate-term basis, I expect FXI to retrace at least 50% of the prior drawdown from 2021 which could form strong resistance near $37.65 up to $39.
That area, as shown below, also would intersect the prior uptrend that was broken in China’s Large-cap Equity ETF (FXI). Thus, a multi-year intersection of former support which now could be tested in the months ahead likely would represent resistance on a rally attempt.
While it’s difficult to predict a technical move back to new highs from a one-week move off of 52-week lows that has just begun, it’s fair to say that if FXI does successfully get over $39, this would set the stage for an eventual rally back to new all-time highs.
At present, I’m inclined to view the rally as tactical only, but one that likely does have longevity between now and next Spring/Summer.
Thus, exiting Chinese equities now for short-term trading purposes does not yet seem prudent. Furthermore, on an intermediate-term basis, the volume expansion this past week on the breakout to new yearly highs could help carry this higher given the positive momentum.
iShares China Large-Cap ETF
