- Stock indices might encounter volatility into early November but are likely to bottom and rally into mid-to-late December. Trends remain bearish, but overly pessimistic sentiment combined with better breadth and sector participation gives some reason for hope on a larger Q4 bounce.
- Treasury Yields are approaching short-term peaks that likely take yields down into December, directly coinciding with a stock market rally. The negative correlation to Stocks remains quite strong. Pullbacks in Yields into next year looks likely.
- US Dollar index getting stretched based on multiple metrics and has begun to show evidence of daily/weekly momentum wavering a bit on this latest surge. A rolling over in DXY also is a real possibility from October-December but should prove short-lived with a push up into next Spring/Summer providing a larger USD Peak.
- Commodities should be close to bottoming out which likely should happen in late October/early November with Energy as well as Precious metals while DXY rolls over.
- Cryptocurrencies have diverged somewhat positively from Equities since September but remain largely neutral in the short run. Any decline in Stock indices into early November would likely represent a final pullback for Cryptocurrencies before a rally into December.
Key Positives to Consider
- 10/13 Reversal happened in a key time zone for potential trend change and might extend into October expiration before late October weakness.
- Huge upside volume into Advancing vs Declining stocks was a definite positive at recent lows.
- Enormous low to high range from 10/13 was a technical positive following the recent churning, and pullbacks into early November should provide possible more attractive risk/reward areas to buy dips.
- Momentum and breadth had failed to follow prices down under September lows over the last week. This positive divergence was an important short-term bullish technical sign. Daily and weekly divergence in momentum indicators like RSI and MACD are present.
- Sentiment had recently been getting worse and worse, with Equity Put/call ratio reaching extremes while VIX showed backwardation after trading up near the highs of its range.
- DeMark signals have “started” to be confirmed on various Equity indices, but both daily and weekly (and in some cases, Monthly) exhaustion signals using TD Sequential and TD Combo are in place on many Equity indices along with Treasuries and major currencies.
- Sector performance over the last week had shown Technology weakness to have disguised some of the strength shown by sectors such as Industrials (Transports in particular) along with Financials, and Energy. All of these look more positive than Technology at present which will need a Treasury rally to gain some traction.
- Cycles should bottom by first week in November based on Mass Pressure index into mid-December while my cycle composite from the Foundation of the Study of Cycles has already bottomed, and is positive into December. Both show a good likelihood of a Q4 rally once November gets underway.
- High Yield corporates have largely diverged positively lately and did not decline to new lows despite recent pullback in Equity indices like $SPX and $QQQ under September lows.
- Mid-term seasonality favors strong performance of 1.0% in November much stronger than normal November of +0.3%.
- Defensive groups like Utilities and REITS have underperformed dramatically in recent weeks and remain the worst performing sectors over the last month. This can be seen as a positive, as these groups have actually underperformed Technology, and historical huge underperformance in these groups has occurred near former lows in 2008 and other bear market lows.
Key Negatives to Consider
- Daily, weekly, and monthly momentum remain negative sloping and most major indices remain within downtrends from last November/this past January’s peak. Most trend following models remain quite negative and will be slow to turn positive barring meaningful structural improvement.
- October remains a volatile month, and one cannot rule out further volatility into end of October or even early November ahead of the FOMC meeting and mid-term Elections. Key cycles like 40-year cycles and 90-year cycles have prominent turns this year. Some of these focus on October/November so getting some clarity as to whether markets are truly bottoming yet is key.
- Technology has been the worst performing sector over the last week and has lagged sharply over the last month. Given that this remains the #1 ranked sector by capitalization within SPX, we’ll need to see some stabilization and evidence of relative strength in Technology to have any real conviction on a meaningful SPX and $QQQ rally.
- DeMark exhaustion signals on weekly charts of $TNX and $TYX have not yet been confirmed, nor on DXY and it’s thought that given the negative correlation to SPX, showing some real evidence of these breaking down is critical to the thinking of SPX rallying with any kind of duration.
- Elliott counts took on a more negative intermediate-term view with (what appears to be) a five-wave decline at or near completion under September 2022 lows. While a counter-trend bounce is certainly likely between now and December, it’s tough making the case for a move back to highs given these counts. The most likely outcome is a sharp three-wave bounce followed by a possible five wave decline back to lows before any serious market low, i.e. a bear market low, is at hand.
- No meaningful capitulation happened regarding excessive TRIN readings (ARMS Index) at Thursday’s lows. While sentiment was quite bearish, normally more capitulation in volume or Advance/Decline typically happens near major lows.
- Weekly cycles show the potential to bottom out in Q2 of 2023, so while the near-term cycles show strength from late October into December, this might require a retest of lows into 2023. In other words, short-term strength might be sellable on any material bounce.
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