There are some indications for a short-term bounce but we continue to see a move down to the 425 – 420 area by early October as being possible. Since everybody is interested in semiconductor stocks, they might go just a bit lower than people think. XLG is coming down and this should be a decent play into the end of this year.
We realize that many are looking for seasonal weakness into October, but there are technical reasons to be slightly negative. We still think it is possible to see the 420-area on SPY, where we would buy a stochastic recycle.
One of the things we have found is that stocks that break down in September usually fall off into the end of October, and sometime even into December. Stocks making new 52-week lows in September are vulnerable to tax selling, and the vulnerability increases the later in the year this occurs.
It is Options expiration, and triple witching as well, so don’t read too much into the action. According to the Erlanger work, utilities have some seasonal strength starting in October – and since they are at the bottom of the range it is probably a decent time to start to add these to portfolios. As technicians, we would buy NLR right away, with a possible position in URNM for clients that want the actual commodity.
Short-term breadth indicators look okay, but not great, suggesting we could see some weakness over the next couple of weeks – but this does not damage the intermediate picture, which is still positive. All of these Chinese ETFs (FXI, GXC, PGJ, KWEB) traded down to the bottom end of their respective right shoulders and have held – and started what looks to be a tactical rally. While sentiment is a condition indicator and not a timing tool, the bond setiment chart does suggest there is “Gas in the Tank” to support a bond rally.
Small Cap is also rallying and so far, is keeping pace with SPY, but not leading. Aggressive traders should look to take some profits at the end of the week.
Stocks look to rally this week, and we would consider adding some longer-term money at this point – say 50% of what you have available. Weekly stochastics are in sell mode, suggesting the next sell pattern could target SPY 420 – which is why we are not putting all of our cash in here. Bonds: The message here is to start increasing duration, but maybe do this a bit slower than we thought we would at this juncture.
Strong technical charts report good earnings more often than not. Recall that what we are looking for is the possibility of a short-term interest rate spike that then moves back into the range. This suggests a move below 112.50 on IEI, say to 110, and then back above 112.50, creating a false breakdown. Then, we would buy duration – say TLT.
Our advice to advisors is to add some money to models here – and to both Growth and Value. We think money could start moving back into banks by the fourth quarter. UUP may be starting another leg up, and a move above 29 to 30 suggests this is happening, and target 35.
Overall, we have no change in our forecast that a test of 420 is possible. We believe this latest downgrade of the banks is a mistake by Fitch and still look for banks to have a strong advance into the end of the year.
Internal indicators continue to show deterioration suggesting this pullback is not over, but there is also nothing in the data that suggests this is more than a correction. We recommend closing out seasonal oil trades at this time.
Both KRE and XLF look ready to rally, and we would be using weakness here to add to these. EWI has been one of the reasons we have shied away from Europe over the past year.
SPY is testing support in the 446 to 444 area, and if this can hold for a few days this may have been it for a correction. Even if you are in IJR, watch IWM, because if it can move above 200 this could provide a “kick” to both of these. We would be careful if GLD starts to hit new lows.
Stocks had a reversal day last Thursday, and we believe this is part of the short-term topping process we have been looking for. We have been looking at the possibility of a move back down to the 420-area on SPY, and as part of that a move down to 135 on QQQM. If this pullback occurs, and we see those price levels, we would add money.
We would wait for a pullback to add money to existing accounts, but for new accounts that arrive that are cash heavy, it is ok to add money. TLT continues to trade a bit weaker than we expected, and a break below 98 would be a concern, suggesting this could test 95 if that breaks.
Banks are starting to pick up and Tech has shown some weakness. Sectors that have lagged a bit should continue to pick up – Healthcare and Industrials, for example. As readers know, our favorite Asian market has been Japan, for the last several years, but adding one of these (EWS, EWY, THD) to an Asian allocation would make some sense.
We could see a pullback to the 420-area on SPY. There has been no big change in the internal indicators – accumulation is still strong enough to support further upside, and breadth indicators are overbought but not negative configurations. While banks sold off on the positive stress test and stronger earnings news, we believe that this part of a pattern that will lead to a bank rally in the second part of 2023.
There is a big NASDAQ rebalance coming and we have had questions about what this means for the markets and the index? For QQQM, we would add some money here now, and more on a correction.
