The tug-of-war between bulls and bears seems never-ending, as any hint of inflation easing seems to result in a sharp recovery for Equities. Yet, Tuesday’s BOE governor’s comments seemed to throw “cold water” on the rally in global risk assets when he reiterated the plan to stop bank intervention in the bond market by end of week. Importantly, Equities continue to trade in a very tight positive correlation with the move in Treasuries, but even on failed rally attempts, are having a tough time pressing lower. While many correctly point out that $QQQ is back at new lows for the year, the Equal-weighted Value Line Geometric Average remains well above late September lows, as groups like Financials, Discretionary and Healthcare are faring far better than Technology lately. This camouflaging effect of Tech appearing to drag the market lower every day simply isn’t true when one strips out the effects of Technology, and momentum and breadth are in better shape than they were a week ago, specifically given how sharp last Monday and Tuesday’s rally proved to be. Overall, I continue to feel that downside should prove limited in Equities and that positioning long ahead of an important CPI number against a backdrop of negative sentiment that’s grown even more extreme makes a ton of sense.
Crude looks to be near a minor correction following its steep rally, but commodities still outpacing Equities
The sharp rally in WTI Crude did look important in exceeding the larger downtrend which had been in place for Oil and seems to suggest lows very well are in place as Q4 has gotten underway.
Near-term, the recent stalling out near Ichimoku Cloud resistance looks important, and while it’s tough to rule out a push higher to test late August peaks just over $96, a pullback to the low to mid-$80’s looks quite likely in the weeks ahead.
Energy likely could underperform in the short run, but most investors with an intermediate-term focus look wise to avoid putting too much focus on a pullback and rather just using weakness to buy dips in Energy.
Energy’s outperformance this year has proven difficult to fight, and $XLE remains the only one of the major S&P sector SPDR ETFs with positive performance on a three-month and YTD basis, higher by 13.11% and 43.21% respectively.
Overall, I like buying dips in Energy, and overweighting this group for Q4, regardless of if a minor pullback to the mid-$80’s happens in the weeks to come. Integrated oils remain preferred within the sector, but Exploration and Production stocks along with Alternative Energy stocks would be a focus on any Crude decline in the weeks to come. Both of these groups are thought to offer attractive intermediate-term relative performance, and Energy should outperform if/when Crude’s bottom for 2022 happened in late September.
SOX looks to be close to bottoming and should happen this week
Semiconductor stocks should be given some focus as this decline is growing closer to DeMark-based support.
Weekly charts show TD Buy Setups in the PHLX Semiconductor Index ($SOX) to be potentially one week away, and prices lie right above key TDST support.
Daily TD Combo signals were triggered on Tuesday’s decline which creates an appealing confluence with the weekly signals which I feel should be important in causing support to materialize and a reversal of trend.
Recent pullbacks have not been successful in dragging momentum lower, and positive divergence is now also present which I feel should be important in triggering a reversal.
While Semiconductor names have performed dismally in recent days, proving to be a huge headwind for Technology, I view this to have an excellent chance of changing as rates start to peak and roll over.
Support for SOX lies at 2170, and I’m skeptical that it undercuts 2150, but should be close to a bounce which should initially lift this up to 2700-2800.
Sentiment is getting worse and worse, and should prove to be one important catalyst for an upcoming bounce
While many continue to comment on the bearishness of traditional sentiment gauges like AAII, or Investors Intelligence (both of which have reflected some of the most bearish readings for 2022 in recent weeks), it’s the other sentiment gauges that are suddenly providing the best signals.
Importantly, the $VIX has finally reached official backwardation with spot VIX levels now two points above 3-month futures. While lows typically happen when spot VIX reaches five points or higher, this is now “on the radar” for being relevant as to why Equities can bottom.
Furthermore, JP Morgan’s Global Equity Sentiment index has plummeted further and reached the lowest levels since Spring 2020.
In addition, Bloomberg’s Market Pulse index has now reached its “Panic” levels, undercutting 2020 lows to the lowest levels since 2015. Bloomberg notes that readings below 0.4 indicate “Panic” and historically have produced rallies averaging +9.1% in the subsequent three months, normally led by Small-caps.
Finally, the Equity Put/call ratio, shown below, officially did provide a reading above 1 in late September and its 13-week moving average has now risen above 0.70. This is a very elevated level historically, which was last present in March 2020 and in late 2018 following that year’s steep late year decline.
Overall, our formerly bearish sentiment readings have begun to reach more extreme bearish readings, which historically have coincided with market lows. While some might argue that true capitulation is needed for “The Market bottom” I’m convinced that we’re near “A market bottom” and this should happen sometime this week.