Note: I will be traveling in the Middle East next week to speak at the Global Investment Summit in Dubai. I’ll try my best to deliver as much content as possible next week.
Near-term and intermediate-term technical trends remain bullish for US Equities, and the traditional weakness following the Rosh Hashanah holiday looks to have played out as planned and should now be stabilizing. I suspect that next week brings about a rally which should lift prices back to all-time high territory into mid-October. This week’s pullback has not proven stronger than any of the minor periods of weakness seen in recent months, and the risk/reward looks quite appealing for US Equities to begin to stabilize and rally back to new highs. Precious Metals, Cryptocurrencies, and Treasuries also look appealing at current levels and all should rally into mid-October, technically speaking.
I’m encouraged by the degree of strength which occurred today and expect that the next couple weeks are going to be positive as SPX turns back up and possibly challenges 6800.
Market breadth proved to be more than 2/1 bullish during Friday’s session, and there was some encouraging strength in sectors like Industrials, Discretionary, and Healthcare, which had been lagging a bit lately.
Overall, the risk/reward has gotten much better than a week ago, given the minor pullback, which doesn’t look too different than any of the minor 3-5 day corrections that happened throughout May into August. As said previously, I’m not expecting a larger September breakdown into October, but rather feel a strong push higher into mid-October is likely.
This would gel with the seasonally bullish tendences in pre-Election Octobers, and likely could also coincide with a strong rally in Cryptocurrencies along with Treasuries and Precious metals.
While there remains a strong possibility of some cyclical weakening in Equities in the month of November, the goal for market bulls in the weeks to come will be to produce a broad-based rally that helps most of the recent lagging sectors begin to “kick into gear”. I’m not confident this happens right away, but it would be something that would add confidence that any late October into November pullback would likely prove quite mild. For now, it’s right to position for a rally back to highs, and we’ll be closely watching the weekly DeMark indicators along with a close eye on breadth and any hint of market weakness.
As shown below, this week’s three-day decline failed to do any damage to the larger pattern. SPX managed to fill its gap from Wednesday into Thursday and closed up sharply on Friday, closing near the highs of the session on good market breadth.
I’m expecting that prices should be stabilizing and should not encounter much more weakness into next week. Despite the lack of DeMark exhaustion signals, I’m expecting a push back to new highs, and a very bullish 2-3 weeks of gains into mid-October.
S&P 500 Index
Energy Sector SPDR ETF (XLE) looks to rally to mid-$90s
Energy has turned up quite sharply over the last week and proved to be overwhelmingly the best performing sector in the past week, outperforming the next best sector, Utilities, by over 200 basis points (bp.).
Technically, Energy securities have followed WTI Crude’s gains of four straight days of upward prices, and Energy ETF’s like XLE -0.17% XOP 0.84% and also OIH 0.56% have all made short-term breakouts this week which was highlighted in Wednesday’s Technical Report “Anticipating Not much more weakness before rally back to highs”.
I expect this rally can likely continue into late October before facing strong resistance and beginning to retreat. However, for those concerned about short-term progress, XLE -0.17% looks likely to rally up to $96 from its current $92.50 and can outperform in the very near-term. Overall, this move should not result in meaningful intermediate-term breakouts for Crude nor many Energy ETF’s, but merely a sharp short-term bounce only. Thereafter, I expect to see Energy show selling pressure into year-end.
Energy Select Sector SPDR Fund
Crude oil might rally through October before peaking out
Interestingly enough, the daily WTI Crude oil cycle composite chart begins to strengthen sharply between now and early November.
Technically, my view is that following four straight days of gains, WTI Crude likely has begun to turn up into October and should be able to follow-through higher to the high $60’s before stalling out.
My cycle composite shows strength into late October/early November before starting to weaken back down to the low $50’s at a minimum.
This reprieve in the selling should not mean that Crude’s path will be straight up for the balance of the year and that a pullback to test Spring 2025 lows cannot happen.
After all, WTI crude oil seasonality remains quite negative in the back half of most years and particularly heading into Winter before turning up early in the year.
Overall, given the many breakouts among various Energy ETFs, I suspect that Energy is a likely outperformer for October before beginning to lag and underperform in November and December.
WTI Crude Oil Cycle
AAII finally switches to more Bullish than bearish, but “Percentage Bears” remains stubbornly elevated.
As shown below, AAII has finally begun to show more Bulls than Bears in its Investor survey following more than a month of bearish sentiment.
While the “Percentage of Bulls” at 41.7 is more than the “Percentage of Bears” at 39.2%, it’s wrong to think of this poll as having gotten speculative or overly bullish.
In my own experience, with “Bears” being close to 40%, this remains stubbornly high, and it’s unusual to see a large selloff with the percentage of Bearish investors so high.
Normally, when the bearish levels drop below 20%, this is a more actionable signal from a contrarian perspective, and is considered a warning.
Overall, I expect this to likely widen out substantially in the next 3-4 weeks, and if this does happen, it would present a possible sentiment-based “sell signal”. At present, it’s still rather subdued having just barely flipped to Bullish.
October tends to be very good in the first part of the month in Pre-election years
It’s worth noting that Post-election year Octobers tend to be quite good in the first part of the month, and much better than the latter part of the month.
While its right to criticize seasonality tendencies as having “fallen flat” this year during the traditionally bearish time of August into September in Post-election years, this period of better than average performance during early October also lines up with the Yom Kippur seasonality studies which indicate better performance once the Jewish holiday period of Rosh Hashanah to Yom Kippur is complete.
This early month period of possibly good upcoming performance would also line up with weekly DeMark indicators for SPX and QQQ which remain early by roughly three weeks to trigger any kind of exhaustion signal.
Overall, I am anticipating that US equity indices push higher into Mid-to-late October, and today’s positive close looked quite encouraging as a possible starting point for this rally.
