The upside follow-through looks likely to extend into next Tuesday/Wednesday and still looks quite premature to fade. While this rally likely gets up to 4125-50 at a minimum, one cannot rule out a larger push higher if CPI reports show weakening headline inflation on falling gas prices. However, I don’t expect this rally to go on non-stop throughout the month, and longer-term investors might decide to hold out and wait for weakness in the back half of September before buying dips in October. Technically speaking, I’ll discuss some of the reasons for this week’s rally on the following pages, but continue to believe that sentiment remains an important piece of the puzzle along with cycles and positive market breadth for this past week at a time when many remain in disbelief. At present, stocks should trend up into the CPI report and past this number into mid-week before possibly peaking out and turning lower. So, in a nutshell, I expect near-term volatility higher, then lower. Have a great weekend.
5 Key reasons why Stocks rallied this week
- Financials and Healthcare both kicked into gear and outperformed. These two groups make up 25% of $SPX alone. Thus, our rally this past week was far more broad-based than many might have realized.
- Sentiment had gotten as bearish as we’ve seen since Mid-June with AAII Bears outweighing bulls by more than 35 percentage points.
- My Cycle composite shows strength into mid-September before a late month pullback.
- Breadth had gotten too compressed with the Percentage of $SPX stocks >20-day moving average having fallen under 5% early this week.
- Price/time confluence – As discussed in notes last Friday into this past Tuesday, some interesting Fibonacci relationships had surfaced (based on time) that centered on this period in early September for a rally into mid-September.
Gann Price/Time angles show strong upside resistance near 4300 for $SPX
It’s always important to make use of Gann’s price/time angles when determining areas of key support and resistance, as these can be vital towards visually seeing where prices might consolidate, vs show some follow-through trendlike behavior.
By measuring units of price to time, one can see how stock indices might peak or trough while being far away from the most common moving averages that the broader public utilizes.
The current 3×1 line (3 units of price per unit of time) hits directly above at 4300 and will be a strong area when next approached).
Performance data shows how this week’s rally was particularly broad-based
In last week we’ve seen particularly strong movement out of both Financials and Healthcare. This is important given that these sectors both approximate 13% of $SPX and are worth more than 25% of the market.
Discretionary, Materials, Utilities, REITs and Industrials were also up more than 3% on the week, a fairly broad-based move.
This was important specifically because Technology had not strengthened that dramatically, and these groups all outperformed “Tech.” Thus, it’s helpful during times when Tech is not performing well if many different parts of the market can help the market show strength.
This broad outperformance should be important in helping the market hold up relatively better and likely not break June lows like many expect in the weeks to come.
Percentage of $SPX> 20-day moving average hit < 6% into early this week
Interestingly enough, the percentage of $SPX issues above their respective 20-day moving averages (m.a.) dropped down under 6% earlier this week, the lowest since June and the second lowest level of 2022.
That’s important in showing that markets had quickly gotten oversold, despite RSI levels not officially breaching 30 on daily charts.
This proved to be another important signal which when put together with sentiment, and cycles and other listed reasons, why markets might bottom out and rally this week.