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. Monday’s success in climbing over last week’s highs for SPX and QQQ should enable these to both push back to new all-time high territory. Despite some minor warnings regarding breadth, high yield spread widening, and/or lack of broad-based participation, it looks like breakouts in AAPL GOOGL should help Technology show sufficient leadership to carry US stock indices over the next few weeks. At present, many of the momentum trades of recent months have begun to slowly unwind in recent weeks. While this doesn’t portend a rally continuing in any of these, the structure of this “risk-on” trade has begun to noticeably change in the short run. I expect this might bring about volatility next month, but for now, trends remain intact.
While bullish, I am sympathetic to the notion of a choppier trading environment over the next month before markets begin a more broad-based rally.
Despite AAPL, GOOGL, and NFLX having broken out yesterday, there proved to be a violent pullback in stocks like NFLX -3.57% , MAT -1.12% , and TXN -1.79% after hours, while Precious metals suffered one of their largest selloffs in years.
This comes on the heels of some weakness in the Quantum stocks along with Cryptocurrencies in recent weeks, while Goldman’s Momentum basket (GSPRHIMO) fell sharply in the next week.
Does this signal that the market might be in trouble? I doubt it for now, as evidence of some good upside follow-through in Consumer Discretionary and Industrials has been happening of late. Furthermore, despite the after-hours pullback in NFLX -3.57% , there’s been some encouraging evidence of “Magnificent 7” (Mag 7) coming back to life this week on gains from AAPL -0.22% , GOOGL -0.87% , and others.
As discussed yesterday, the structure of this rally since October has proven choppy and a bit overlapping. Thus, one can’t rule out the recent gap near 6675 being filled, similar to what happened last week.
Overall, it’s right to expect that any Wednesday weakness could make ^SPX and QQQ 0.01% attractive, given the recent structural improvement early in the week. Bottom line, it looks right to be bullish, looking to buy any minor pullbacks that happen over the next 1-2 days before US Equity indices push higher.
I do not expect that 6550 will be violated on any near-term weakness, expecting that ^SPX pushes higher to exceed 6800. As seen below, there’s been some weakness in momentum, and this will need to improve into November to avoid the possibility of some weakness mid-month. At present, there isn’t any technical evidence to support a selloff right away, so near-term weakness should be buyable.
S&P 500 Index
Goldman’s Momentum pair trade has begun to give way
Goldman Sachs’ “High Beta Momo” (GSPRHIMO- Bloomberg) is a custom basket pair trade that represents an equal notional pair of going long GSXUHMOM – High Beta Momentum Long and short GDXULJMOM (high Beta momentum short) has begun to break down sharply in the last week. While this is different than simply analyzing a basket of just the pure long -GSXUHMOM, it does represent a meaningful change following a strong two months of trend following behavior for both momentum-based longs and shorts. My sense is that the deterioration here could indicate that markets are certainly growing trickier, and this could give way to volatility in the next month.
GSPRHIMO Index
Gold reverses the most in five years as Precious metals and Mining stocks are hard hit
This volatility is something that technicals suggested might be possible, and the question for most is whether this directly leads to immediate continuation, or is an exaggerated decline? (For those who might not have read my commentary on the precious metals, kindly review the last couple of weeks’ notes.)
While this move was overdue, the first sharp decline typically does not constitute the start of a continued decline and can often lead to a rally back to highs, which then fails. My thinking is that spot Gold likely does not decline under 4040 for the time being without snapping back, and both Silver and Gold might make new highs before a larger rolling over.
Overall, the risk/reward for investors seems poor; However, the risk/reward for shorter-term traders seems far more attractive toward looking to buy the first bounce as the larger trends have not been violated just yet. Thus, this very well might prove to be a peak in momentum, but I expect both Gold and Silver prices might make an attempt to stabilize in the next 1-2 days and then turn back higher. Bottom line, until there is evidence of the larger trends being violated, it’s normally correct to consider the first “Shot across the bow”-type decline (like what happened today) to be a trading opportunity for those who are short-term oriented, while more of a warning sign for intermediate-term investors.
Ideally, prices look close to bottoming technically, and this could be in place sometime this week before beginning to push back higher. One should watch the speed and structure of the bounce, which I believe likely could lack the same kind of velocity as was apparent today. Upon a push back to new highs, I believe that both Gold and Silver could be vulnerable to rolling over in a larger fashion in the months ahead.
Some of this might be due to long-term interest rates starting to stabilize and turn back higher in the months to come. As seen below, despite the very sharp move lower today, the longer-term trend remains intact and might spell opportunity for traders who might be looking at an appealing technical trading opportunity at long-term support.
CFDs on Gold
Dollar’s gains on Tuesday appear short-term positive; However, I do not expect a move over August peaks right away
Tuesday’s gains in the US Dollar look possible to extend following the decline from last week.
Overall, while DXY has not followed Treasury yields back to new monthly lows, I am not certain that DXY will begin to move down right away in the near future.
Technically, this pattern has shown far more evidence of stabilization than I saw as being likely one month ago. However, this doesn’t mean that the US Dollar has begun a larger rally back higher.
My view is that a choppy period of consolidation could now play out in the month ahead. Thus, while DXY might rally to test August 2025 peaks, I’m skeptical it breaks these right away. Thereafter, it likely begins to pull back and forms a larger consolidation pattern.
Eventually, moving back to new lows seems likely for DXY, and might also happen with Treasury yields. However, increasingly, I’m viewing it as more likely that both Treasury yields and the US Dollar should be close to bouncing in unison. Thus, the recent rally in Treasuries might not extend too much more in the next week, but rather could begin to stall out and turn back lower. (Thus, yields very well could bounce into late October, and this might also happen with the US Dollar in the short run.)
U.S. Dollar Index
