October 15, 2018
Summary: Equities remain trending down from mid-September as part of the intermediate-term uptrend from 2016 and 2009. While the downdraft was particularly severe last week, living up to October's reputation as a volatile month, it failed to do much damage to the long-term trends. Thus, this is considered short-term only in nature as of now. Momentum, however, has seen some damage as a result of the recent pullback when looking at weekly charts, with MACD crossing the signal line and turning negative. Daily momentum meanwhile reached the lowest levels of oversold territory of the year and has started to diverge positively on hourly charts (a good signal for Bulls) Arguably, last week's pullback never really gave the old fashioned "fear-based" BUY signal, as markets witnessed no real evidence of volume capitulation on the downside, nor outsized Equity Put/call readings. Thus, it remains a tough market near-term to have much conviction that any low into mid-October is sustainable. Seasonality argues for a sharp rally into most mid-term Election periods in early November. Yet, seasonality this year has been remarkably unpredictable with better than average August and September performance while Q4 has gotten off to a much worse start than normal. Overall, there stands a good likelihood that we haven't seen the last of the volatility this year, and it pays to monitor the sector rotation carefully for evidence that Technology and Financials can begin to make a more sustainable comeback after recent weakness. Bottom line, Long-term trends are fine, but some definite signs that markets could be entering a new stage, with momentum and growth rolling over as the search for new leadership has begun. Failure to mount a strong rally in the weeks ahead that turns down to challenge last week's lows would be a mild concern. Yet until the long-term trends are broken, this should remain a dip to buy into, as oversold conditions as part of long-term uptrends give way to opportunity near-term.
Warning Signs that gave us proper “Heads-up” about Stocks turning lower
1) Market breadth peaked in late August- NYSE "All stocks" advance/decline along with Summation index both moved steadily lower throughout September
2) Divergences between US stocks and the rest of the world started to widen materially in August/September
3) Technology underperformance- This proved to be the true technical catalyst (25% of SPX) and peaked relatively in June and has lagged over the last few months with Semiconductor weakness particularly troublesome
4) Defensive outperformance - Looking back one month ago, Utilities had outperformed both Financials and industrials Year-to-date while showing better one-week performance vs Technology
5) Sentiment indicators like Investors Intelligence widened out to a Bull/Bear spread of +40 heading into September which largely persisted the entire month (Stock indices peaked 9/21)
6) Stocks hitting new 52-week highs began to steadily drop off, but became particularly pronounced right before the early October part of the Decline, with stocks hitting new 52-week lows expanding to a greater number than New highs.
7) Negative momentum divergence on daily charts of SPX, DJIA, NASDAQ- Prices had pushed back to new highs, yet momentum was lower and had failed to keep up pace
8) VIX diverged positively with the higher lows in September and early October failing to fall to new lows even as indices pushed higher
9) Demark's TD Sequential and TD Combo indicator had both signaled exhaustion signs right at the peak where stocks had topped out at 9/21, forming 9-13-9 patterns
10) Trend violation on 10/4. While many of the factors above were in place throughout September, prices had held up in resilient fashion up until 10/4 when S&P, NASDAQ and DJIA all violated three-month uptrends from late June. This was the first real warning sign that price was finally confirming what breadth and momentum had been suggesting for some time.
What are the Technicals suggesting should happen now?
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