The extension of this week’s rally helped markets show greater than 5-8% gains, but has begun to change texture a bit as the week has come to a close. The former outperformance in DJIA has shifted a bit towards cyclicals and Technology while Defensive issues lagged sharply on Friday. While the DJIA had already broken out above its downtrend from early 2022, the QQQ has just started its bounce and successfully broke out above late October peaks as the week came to a close. Markets are heading into a historically tough time of the month of recent history is any guide, as the last three peaks all happened between the 13^th and 15^th of the month. Yet, breadth has expanded sharply and should allow for some cushion on any pullback to consolidate gains ahead of the US Thanksgiving holiday. Overall, I expect that the US Dollar along with Treasury yields likely make a short-term bottom next week, and this likely coincides with a minor SPX pullback. However unless 3850 is breached, weakness is likely going to prove minor and buyable for the time being. I expect SPX to follow the trend of the 60-year cycle up into early December without much serious damage. The QQQ breakout is shown below.

DJIA has successfully broken downtrends from January

Don’t look now, but the DJIA’s rally has brought it to within 7% of its all-time high close as this week has come to a close. In what was thought to be a nearly impossible feat, DJIA has successfully broken its downtrend for 2022, led by strong performance out of stocks like JPM, CAT, GS, BA, IBM and INTC.

Just in this past rolling month alone, BA, JPM, CAT and GS have rallied more than 30%.

However, this past week, DJIA showed losses in DIS, UNH, RTX, JNJ, MRK and MCD in what appeared to be a clear rotation out of Defensives. Pharmaceuticals within healthcare were particularly hard hit, and some evidence of overbought conditions was one of the reasons for my decision to exit LLY this past week.

Overall, I feel like August peaks at $34,295 should prove to be strong initial resistance for DJIA which has just crossed its 61.8% Fibonacci retracement of this year’s decline. However, any backing and filling likely will prove minor into late November and I expect DJIA’s rally shows further strength into year-end before any 2023 weakness.

From an Elliott standpoint, DJIA looks to be in the final stages of its rally off the October lows, but I will hesitate in turning bearish without proof of this starting a more meaningful correction. I do expect the rotation out of Defensives to continue into December.

XOP likely starts to outperform again as WTI Crude lifts into December

While Energy has proven to be outstanding this year in every aspect, despite Crude oil temporarily weakening from $120 down to the mid-$70’s in Q3, it’s been important to recognize the sub-sectors to favor for outperformance.

XOP has lagged other sub-sectors over the last couple months, and specifically vs OIH as Services and Drillers came back to life. However, given that WTI Crude looks to be starting its recovery back to over $100, I’m expecting that the Exploration and Production names should be favored into year-end.

As this ratio chart shows of $XOP vs $OIH, we’ve seen some steep underperformance in XOP vs OIH since August. This now looks to be nearing an end just as OIH wrestles with former June 2022 highs. DeMark indicators show the formation of a TD Buy Setup on XOP relative to OIH just as this recent relative weakness is nearing its larger uptrend.

Bottom line, in plain English, I favor buying into $XOP and expecting better outperformance out this into year-end as WTI Crude starts to move back higher.

My cycles on Crude show this rallying into December before some early year weakness, but expect that pullbacks likely bottom out by late February and then this turns back up again into late Spring.

SPX issues above 200-day moving average are now above 50%

Interestingly enough, we’ve seen intermediate-term breadth gauges show some real strengthening despite many benchmark indices still well under ongoing downtrends.

For instance, SPX and NASDAQ along with Value Line Composite have not yet exceeded their respective downtrends from early this year. Yet the underlying strength seen in the market has been more impressive and over 50% of issues are now above their 200-day moving averages (m.a.).

I discussed a few weeks ago that sectors like Industrials, Materials and Healthcare had all rallied more than 10% in the rolling 1 month period to join Energy in showing strong performance.

It’s largely been the Tech-heavy NASDAQ that has underperformed, and the downtrends in both SPX and QQQ look deceiving given the broad-based strength we’ve been witnessing in other sectors.

Overall, I feel this is an encouraging data point towards why markets likely hold up into end of year despite being near-term overbought on hourly charts after this week’s surge. While pullbacks to this week’s gains very well could materialize starting next week, I’m not expecting it will prove severe.