Near-term trends are bullish for SPX, and I anticipate a sharp rally to finish the month of October after an interesting period of sector rotation in recent weeks. Despite the choppiness of late, there hasn’t been sufficient technical deterioration to suggest the trend might be turning lower. However, it’s fair to say that sentiment has turned rather jittery heading into the weekend, and volatility has increased across many asset classes. Signs of VIX spiking, and momentum unwinding in Quantum computing stocks and Cryptocurrencies this week represent a change and are important to take note of. Much of this volatility might be attributed to the Regional bank credit jitters, and it’s taken a toll on Financials late in the week. Meanwhile, both US Dollar and Treasury yields weakened this week, and the “Magnificent 7” have been churning in range-bound consolidation for more than a month. Overall, the combination of time-based indicators and Elliott-wave structure seems to project higher to late October/early November before a possible peak, and there hasn’t been sufficient weakness in the trend of either SPX or QQQ to turn bearish. Bottom line, while some stabilization in the Financials sector looks important given its heavy percentage within SPX, I feel like short-term negativity combined with volatility that has failed to break trends should still lead US Equities higher.
Until there’s evidence of October lows being broken, the path of least resistance remains higher, despite the short-term consolidation that’s been happening in the last few weeks.
I don’t suspect that 6555 will be broken in ^SPX over the next couple of weeks, and a coming push back to 6800 and potentially over this level looks possible between now and early November.
AS the chart below illustrates, however, it is imperative that some strength happen sooner than later to break out of this recent triangle pattern before gaining confidence that the trend should push higher immediately.
Heading into next week, this past Thursday’s high to low range should dictate when this trend is giving way to the upside or downside. Specifically, as discussed yesterday, regaining 6709 will be the key technical catalyst that helps to aid the near-term trend and helps to steer ^SPX back higher to new all-time highs. Meanwhile, ^SPX should have “no business” being under 6593.99, Thursday’s intra-day lows, which I feel is a trading stop to trend following longs.
The positives involve the lack of material trend weakness despite sentiment growing more jittery in recent days. Furthermore, Technology does not look to have peaked, and ^SPX’s uptrend remains very much in place. Additionally, Elliott-wave structure looks incomplete on daily charts, while DeMark exhaustion in the form of TD Sequential “13 Countdown” exhaustion signals are early for QQQ -0.17% . Finally, the willingness of the Administration to “walk back” former trade-related comments deemed damaging to US Stocks is also a form of a synthetic “Trump Put” which still looks very real in its effectiveness.
S&P 500 Index
On the flip side, Financials remains a very important sector to ^SPX and the second largest by Market capitalization. While I am bullish on Financials for 4Q, this week’s trend damage looks like a near-term negative and did not show signs of reversing properly on Friday (despite the sector’s bounce). Other possible negatives to keep in mind are the slow but sure widening now in Junk bonds on the heels of this Regional bank credit fiasco involving Zions Bancorp and Western Alliance. Furthermore, while sentiment remains still mixed at best, the Equity Put/call ratio remains much lower than might be expected in this environment, showing nearly 2 calls being bought for every put option. (Overall, I don’t see the broader sentiment levels as being extremely bullish nor bearish at present, but more Neutral.)
Financials sector requires some stabilization in Regional banks, along with XLF strengthening, before true confidence in SPX is possible
The weakness in Financials this week continues a trend of underperformance in recent months, which has grown more pronounced in the last month.
This week’s revelation of credit risk in a few of the Regional banks certainly wasn’t helpful in this regard, and both Equal-weighted Financials and Cap-weighted Financials fell sharply vs. the ^SPX in relative terms.
While I am bullish on this sector for 4Q outperformance, the near-term trend requires some immediate stabilization. Much of this urgency has to do with Financials being the second-largest sector within ^SPX by market capitalization. Thus, while it’s certainly possible for Technology to carry the market, in terms of performance, it’s difficult to have a lot of confidence in the overall level of broad-based strength in U.S. stocks if Financials are selling off sharply.
As shown below, ratios of the XLF 0.80% vs SPY -0.13% actually peaked out in April when our stock market bottomed, six months ago. This weekly chart of the ratio between XLF 0.80% and SPY -0.13% has DeMark indicators as an overlay. Interestingly enough, while these look to be three weeks away from a possible meaningful level of exhaustion, they’re still early at this time.
My view is that Financials need to begin showing some technical strength to have confidence in a strong, broad-based rally into year-end. For now, this area is in dire need of some strength at a time when many investors seem convinced that more credit troubles might lurk “behind closed doors”
Insurance stocks have been some of the biggest culprits of negative performance in the last six months, with returns of -10 to -25% in stocks like BRO 2.77% , ERIE 1.51% , PGR 3.65% , AJG 1.95% , and MMC 1.97% .
I’ll comment further on this ratio when there is some stabilization in this sector’s relative strength, which I believe lies right around the corner, technically speaking. However, I’m unable to say that Financials should rebound right away, as this trend has grown worse this past week.
XLF/SPY
Credit gauges now look to be widening from record “tights”
While the Banking issues very well might be contained, it might be difficult to say they’re only happening in Financials.
For now, I tend to watch two gauges as a way to keep track of Credit, the Option Adjusted Spread (“OAS”), and the ratio between Investment Grade and High Yield corporate bonds (as seen in the ratio form of ETFs).
As seen below, the OAS has been trending higher for the last month, but generally has been in consolidation mode since last Summer. I would view a breakout of this trend as potentially being more problematic, given the possibility of contagion in credit issues. Thus far, this hasn’t occurred.
BofA Merrill Lynch US High Yield Option
Ratio of LQD to JNK has been trending higher, but also within an existing downtrend
The ratio of the Investment Grade Corporates ETF (LQD -0.20% ) compared to the High Yield corporates ETF (JNK 0.06% ) is something I often monitor to gauge whether credit is being adversely affected.
When this ratio starts to push higher, it signals that JNK is underperforming, and is something I find more useful than examining the price of JNK 0.06% itself.
For now, this is also contained but has been rising in recent months.
Daily – Division Spread of iShares iBoxx $ Investment Grade Corporate Bond ETF / iShares iBoxx $ High Yield Corp Bond ETF
Fear and Greed Sentiment Index shows sentiment as being in “Fear” territory
This week’s credit developments have taken a toll on market sentiment, and gauges of sentiment run by CNN show their Fear and Greed poll to be back in bearish territory.
While some of the other sentiment gauges I track look more neutral, it’s notable that investors have started to become more skittish, as seen by readings below.
The other popular sentiment poll for Retail investors has also turned more negative, as AAII data now shows more Bears than Bulls after having been bullish for just one week.
Overall, I generally view this sentiment data to be neutral, not bullish or bearish. However, it’s certainly difficult to forecast a market top based on sentiment when gauges like “Fear and Greed” show bearish readings.
Gold has entered “Nosebleed” territory, and does not look appealing for new investments at such stretched levels
The price of Gold has moved parabolically since breaking out of its tight four-month consolidation from earlier this year. My January forecast on Gold from my 2025 Annual Forecast was 3800 back when it traded 2500, and I felt this would be a banner year for Gold.
Now, everyone is talking about it, and momentum has reached the most overbought levels in 50 years on monthly charts. (Very different from 2022 when it bottomed and started rallying, or even from 2024 when Gold broke out from a massive long-term Cup and handle pattern.)
That’s a concern, regardless of the bullish reasons of Real rates falling, FOMC being in its rate-cutting cycle, lack of Fed independence, and fiscal concerns. Those are well known, and obviously, as we’re all aware, there’s typically no bad news at the peak.
Bubbles like this don’t usually end well, but are notoriously hard to fight. They tend to be a poor risk/reward for intermediate-term longs, but short-term trends remain quite bullish. Thus, Gold likely can move higher up to 4500-4600, though I am skeptical that 5k is hit this year.
Cycles show Gold selling off in Q4, and weekly DeMark exhaustion is now present on weekly charts in the form of a 9-13-9 pattern (September’s most recent TD Sequential 13 countdown has now been followed by a TD Sell Setup). Gold’s monthly chart shows a 12 count, meaning either October or November might be a peak for Gold (TD Sequential does not require that the 13th bar be the highest)
Overall, while price remains parabolic, I like trimming longs here (Selling 50% of Gold longs, while using a tight stop on the balance (4200), anticipating that a selloff likely starts from late October or November and moves lower. However, the short-term uptrend from August shows 4000 as trendline support, and this would need to be violated for trend following longs before being too cautious on a larger trend break.
For now, I am losing interest in staying long, even as a trend follower, given such a massive move, and most technicals outside of price call for some serious mean reversion to start within a few weeks. The chart below is a weekly chart highlighting Spot Gold.
CFDs on Gold
