Equity trends remain bullish from early August but have shown mild consolidation over the last two weeks which has resulted in a 2% decline in SPX. While various sectors like Technology, REITS, Industrials, Energy, & Utilities have all drifted lower since mid-October, there hasn’t been sufficient damage towards thinking a big selloff is underway. (Evidence of a bounce beginning started to resurface on Election day and would gain credibility if/when SPX gets back above 5811.) Both US Dollar and US Treasury yields are all getting close to levels where they arguably should stall out and turn lower this month. Overall, I suspect that rallies in both US Equities and Treasuries occur after the US Election as uncertainty gives way to clarity, at least with regard to congressional races. SPX should find initial technical resistance near 5900-5935. Meanwhile, QQQ should find resistance at 503-505.
As discussed above, evidence of the gap at SPX-5811 being filled and exceeded would then point towards a move back to new all-time highs in SPX, to near 5950 in all likelihood.
Tuesday’s About-face looked to be a step in the right direction for market bulls. However, more proof, in the way of a daily close above 5811 to fill the gap from late October, would serve to add conviction to this rally.
My near-term positives revolve around the following:
- Ongoing attractive SPX pattern (lack of meaningful deterioration).
- Elliott-wave pattern appears like three waves from mid-October.
- 2% pullback over the last two weeks held where it needed to be above prior July and August highs in the SPX.
- Technology has begun to kick into gear.
- Sentiment has begun to turn less extreme, given recent SPX weakness. AAII polls have tightened a bit, while the Equity Put/call ratio is now back over 0.65.
- Short-term market cycles show a possible peak near 11/11-12, which then leads to a decline into early December. (Premature as of now).
Thus, while many are inclined to see the Election as a turning point back higher, I would agree only over the next week. The uncertainty heading into the US election is likely to be resolved positively by a short-term rally in US Stock, given some answers about the balance of power in the Congressional races.
Cryptocurrencies, Small and mid-Caps, and Transportation Stocks all showed positive price behavior on Tuesday, which looks to be a short-term positive.
At present, I think it’s worth sticking with US Stocks and expecting a breakout back to new highs, given the lack of damage and the convergence in Bullish to bearish sentiment gauges. If/when sentiment starts to get more bullish, and/or breadth proves sub-par on a push back to new highs, then both of these combined with DeMark exhaustion and cycles could prove important in signaling a possible temporary market peak in mid-November. For now, a selloff looks premature.
S&P 500 Index
Small-cap strength looks worth following in the short run
One interesting development this week centers on Small-caps (based on IWM) starting to strengthen and show better relative strength into the election. For those who have been tracking performance, Small-caps have been notoriously neutral vs. Large-caps for most of this year, regardless of several attempted rally attempts which have all proven short-lived.
Today’s rally above $224 should lead to a coming test and potential breakout of the all-important $227 level, which approximates last month’s highs. Any move over $227 should lead to an acceleration that likely will carry IWM up to challenge all-time highs from this time three years ago in November 2021 near $244.46.
This triangle pattern likely can be resolved by an upside technical breakout, but it will be the act of closing above last month’s highs (~227) which should lead to an acceleration.
(Note: I am notoriously NOT keen on trying to pick lows normally in poor trends or call breakouts within trends, as that’s led to several false breakouts over the years. Even this last 12 months, the move up into late 2023 and the push up into July both proved false.)
iShares Russell 2000 ETF
Momentum starts to favor Small-cap strength
One interesting development in the Small-cap/Large-cap ratio is the push back to multi-week highs in the ratio of IWM vs. RSP relative chart on a weekly basis (IShares Small-cap ETF vs. Invesco’s Equal-weighted S&P 500).
As shown below, this ratio has moved to multi-week highs this week, given the sharp rally in IWM into the US Election. IWM closed on Election Day (11/5/24) at $224.23, just shy of the breakout point of $227.
Momentum indicators like MACD (Moving Average Convergence Divergence) are also set to make weekly bullish crossovers above the signal line on this week’s strength (very highly likely into next week).
Overall, for those who have an aggressive investment risk/reward profile, it looks attractive to favor Small-cap allocation, expecting a likely breakout in IWM potentially as early as this week. At $224.94, a test and possible breakout of $227 looks likely in the near future. Furthermore, only a move down under last week’s $217.63 lows arguably would postpone this move.
However, given the frequent number of false moves in the last year, it’s important to monitor this closely, and expect that a breakout of the entire two-year relative consolidation will be something that brings about intermediate-term outperformance potential into mid-2025.
IWM/RSP
US Dollar starts to turn down as US Election day has arrived
Given that Asset managers (per CFTC Data) have boosted net long positions on the US Dollar for a fourth straight week through 10/29, (the longest streak since April) it seems like many are trying to position similar to 2016, which saw the US Dollar spike after a Trump victory.
However, as I’ve noted, there remain a few precious historical analogs with which to make a strong call based on an election outcome and/or by following recent polling divergences. Back in 2016, the FOMC was on a hiking trajectory vs. a current easing trajectory.
Furthermore, both technical analysis and market cycles seem to suggest the US Dollar (along with US Treasury yields) are likely to pull back into End-of-year following their aggressive bounce over the last six weeks.
As this weekly chart shows, US Dollar index (per DXY) has rallied right into important resistance and appears to be sliding this week as some of the former “Trump trades” are being unwound.
Regardless of the Election winner, I expect a lower US Dollar into year-end from current levels with an initial stop near 102.50 in DXY. The move to multi-week lows ahead of the US Election looks important, as this move happened directly following DXY pushing up to test critical multi-year-long resistance.
U.S. Dollar Index
