Two weeks ago I laid out the potential pathways for the market suggesting that with the markets very oversold a pullback to support was likely. To wit:
“While I point out the prevailing risks, and the disconnect between bullish sentiment and hard data, the reality is the bull market remains intact.
Over the last several months we have been tracking the progress of the S&P 500 with pathways back to ‘all-time’ highs. The very quick retest of support, as noted last week, set the stage for the push to market highs.”
“With portfolios still long-biased, the question is what happens next, and how to play it.”
As I noted then, pathway #2a was the most logical probability given the short-term overbought condition of the market.
- Pathway #2a: Is a bit more of an “exuberant” advance early next week which pulls back to the recent breakout level. The pullback consolidates a bit, works off some of the overbought condition, and then begins the next advance. Such a pullback would turn the previous resistance into support and provide a short-term “buyable” entry. (30%)
Here is the updated chart through Friday:
Currently, it is pathway #2a which continues to play out fairly close to the prediction from two weeks ago. But it is make, or break, next week as to whether pathway #2b comes into play.
As I have repeatedly noted, we remain primarily allocated in our portfolios. However, we were looking for a pullback to support which holds before increasing our existing holdings further.
We have currently lined up our additions for each of our portfolio models but we will wait until next week to make additions until we are certain the current support levels will hold.
As shown in the bottom part of the chart above, the current “buy” signal has been reversed with the recent sell-off in the market. While these “sell” signals have been fairly short in nature over the past couple of months, they nonetheless denote downward pressure on asset prices currently. More importantly, with the market not entirely oversold, top panel of the chart above, there is room for further downside into early next week.
The other short-term issue that keeps us cautious is the “tech wreck” which has occurred over the last week. Given the technology sector makes up 26% of the S&P 500 currently, it is not surprising that “so goes tech, so goes the market.”
The same goes for Semiconductors which are economically sensitive. Morgan Stanley is suggesting memory markets are worsening going into the 4th quarter with inventory and pricing concerns (read tariffs) and weaker demand for DRAM products (read economy). As shown below, in the last 20-years there are only four other times where the Semiconductor index has been this overbought combined with a “sell” signal. With the index close to a monthly sell signal (we won’t know until the end of the month) the concerns by Morgan Stanley may be justified and may suggest more about the economy than is currently realized.
Important Note
Just for your reference here are the top-10 holdings of the ETF’s currently which will change on September 28th. I have highlighted the four FANG stocks.
But, until the end of the month, technology still leads the market. As shown in the chart above, the current short-term sell signal on the technology sector adds to the concern about potential downside risks early next week. The chart below is a look at technical support levels of a further short-term correction.
Support at 2860 should hold. If the market holds at 2860, which coincides with the current uptrend line (red), the odds of push back to recent highs is likely. A failure at 2860 will find support at 2825, 2800 and 2775. These are key levels in the short-term to watch.
As Dana Lyons noted on Friday:
“The Presidential Cycle refers to the pattern of behavior in stock prices throughout the four years of a presidential term. Specifically, stocks tend to be strong during certain periods of a president’s term and weaker during others. And while there are many factors influencing stock prices during a particular period of a particular presidential term, the cycle has been one of the more historically consistent seasonal patterns.
This may be relevant to the current weakness because, on average, the worst performing month of the cycle, historically, has been September of year 2, i.e., the current month.”
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