It was another strong week for the major indices, which were supported by generally broad-based buying interest. Mega-cap stocks led the way again as every S&P 500 sector finished higher. The best-performing sectors were the health care (+2.2%), consumer staples (+1.4%), and communication services (+1.3%) sectors. The relative laggards were the energy (+0.3%), utilities (+0.6%), and information technology (+0.6%) sectors Tech sector leader NVIDIA‘s had a rough end to the week on some possible negative fundamental news out of China, but its soft finish did not derail the broader market on Wednesday or Friday. Although there was some continued thought by many traders that the stock market is overbought and due for a pullback, the possible fear of missing out on further gains appeared to be supporting the indices, along with the continued belief that the Fed is done raising rates.

Year-to-date the S&P 500 is up 15.9%, and the Nasdaq Composite is up 30.8%. Those are big relative moves but are even stronger when measured from the lows registered in October 2022. From there, the S&P 500 has surged 27.6% and the Nasdaq Composite has soared 35.9%.

However, when the major stock indices move too far, too fast, they will normally experience a period of consolidation to work off some of the shorter-term excesses. This process might already be underway right now for the stock market, a normal digestive process.

Where it is today, though, isn’t as important as where it is going. And where might that be? Obviously, I can’t know for certain. Nobody does. However, it may be unlikely to go much higher from here without some pause pullback/retesting or at least consolidation.

A strong run from this level won’t be easy given the fundamental headwinds posed by elevated interest rates, stretched valuations, China’s economic challenges, and the slow-moving storm that is the lag effect of prior rate hikes from the Fed.

To be fair, the stock market might not go much lower from here either, especially if earnings estimates hold up, the Fed is done raising rates, and incoming data continue to defy hard-landing fears.

What we could be looking at, then, is a stock market that needs more time to digest its strong gains, which means a market that has more of a sideways disposition with some volatile swings in between.

So, for the rest of 2023, I strongly believe it’s going to be a stock pickers market, and the focus will be on relative strength. Here at thetechtrader.com, that will be our focus on a daily and swing trade basis, as usual.

 

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What a difference three weeks makes in this stock market. In late October, the 10-yr note yield was pushing 5.00%, the S&P 500 was on the brink of breaking below 4,100, and the CBOE Volatility Index (VIX) was north of 23.00.

Now, the 10-yr note yield sits at 4.44%, the S&P 500 is at 4,514, and the CBOE Volatility Index is under 14.00 at 13.80.

It was quite a reversal. with the S&P 500 surging over 400 points in just 14 sessions or nearly 10%, while the Nasdaq 100 (NDX) exploded for more than 1800 points or 13% during the same time period.

The implication is that investor sentiment has taken a strong turn for the better in the past three weeks, largely because interest rates have come down on the assumption that the Fed is done raising rates and is apt to cut rates in the first half of 2024.

Higher stock prices are usually the result of the improved sentiment, but accompanying those higher stock prices are higher valuations. Three weeks ago, the S&P 500 was trading at a 17.1x forward 12-month earnings, or a slight discount to its 10-year historical average (17.5x), according to FactSet. Today, it trades at 18.7x forward 12-month earnings.

The S&P 500 doesn’t trade at a super-rich valuation, but it’s up there. Just about everyone regularly following the market this year knows why. Apple , Alphabet, Amazon, Meta Platforms, Microsoft, NVIDIA and Tesla (The Nasdaq 100 “Generals”) are also in the market-cap weighted S&P 500 and have certainly raised the valuation bar, but they have typically sported premium valuations.

If anything, there is concentration risk in these seven names. Investors have flocked to them because they are market leaders with healthy financials. They have flocked to them, because, for the most part, they keep delivering results that validate their must-own status. Fund managers have flocked to them, because everybody else has, and the risk of underperforming “the market” is too great not to own them.

Of course, therein lies the risk for these stocks and “the market.” If their fundamental story changes for the worse, their stock prices will, too, and perhaps in a material way.

With the NDX & SPX at or near KEY resistance and forming 4 day bull flag type consolidations, it appears they may be poised to pop and run even further. The previously trailing Transportation and small-cap indices also surged last week playing catch up to confirm the move in the NDX & SPX. a positive technical occurance. Market momentum is strong and a year-end extension rally may very well occur, but a failure to do so immediately next week could result in at least a pullback or further consolidation first.

 

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Most Major U.S. stock indexes rose modestly last week, maintaining positive momentum after a sharp rally in the previous week produced the biggest weekly gain so far in 2023.

Last week, the NASDAQ 100 Index added more than 2.8 % and is now up nearly 33% for the year to date, finishing over 15,500 the highest close in nearly 3 1/2 months. The S&P 500 rose more than 1%, is up 16.6% for the year, and finished over 4400 for the first time in nearly two months.

However, all was not rosy, as a week after surging nearly 8%, the IWM small-cap stock index posted a more than 3% weekly decline that significantly lagged the moderately positive results of its large-cap peers. The result left the Russell 2000 Index in slightly negative territory on a year-to-date basis and down 15% from a recent high on July 31.

In addition, the TRAN or Transportation index also lost ground losing more than 1.2 % for the week. These two negatively diverging sectors are somewhat concerning and could be a drag on further progress in the days ahead unless they quickly play catch up to confirm the recent new multi-week highs in the NDX & SPX.

It was one of the final weeks of major third-quarter corporate earnings releases, and upside surprises from some technology-oriented firms appeared to provide support to the growth indexes. in particular, high-valuation software stocks seemed to get a general boost from cloud monitoring and security firm Datadog, which surged 28% on Tuesday following stronger-than-expected earnings and guidance.

U.S. Treasury debt auctions during the week seemed to play an uncommonly large role in driving sentiment in both the equity and bond markets.

Shifts in the interest-rate outlook continued to drive fixed-income markets as U.S. government bond prices reversed course, retreating in the wake of a rally the previous week. As a result, yields rose, with the rate-sensitive 2-year Treasury climbing back above 5.00% after U.S. Federal Reserve Chair Jerome Powell said on Thursday that the central bank may not yet be done trying to contain inflation.

Oil prices fell for the third week in a row to the lowest level since mid-July as mixed data on the global economy raised concerns about demand for oil. On Friday, U.S. crude was trading for around $77 per barrel, down from about $89 three weeks earlier.

In summary, despite the larger cap indices making further progress last week, we are closely monitoring the action in the Transportation and small-cap stocks for clues to what may lie ahead. Although it may not necessarily be needed, certainly a confirmation from those sectors could mean the current market rally can extend into a stronger year-end rally

We’ll likely soon see!

 

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The major indices experienced solid gains on the heaviest week of earnings reporting for the 3rd quarter season. The calendar featured results from Apple (AAPL), which didn’t meet the market’s high expectations and languished following its report. But, it was certainly a bullish sign for the markets that the rally extended without much participation from Apple.

For the week the small caps actually led with the IWM up over 7.6%. The Transportation index jumped 7%, Nasdaq 100 surged 6.5% & the S&P 500 gained 6%.

Most earnings news was generally met with a positive reaction, helped in large part by the significant drop in market rates. The 10-yr note yield declined 31 basis points this week to 4.51% and the 2-yr note yield fell 17 basis points this week to 4.86%. Short sellers appeared to have covered their positions, helping the sharp drop in rates.

Another important factor driving activity in the Treasury market was the FOMC meeting. The committee voted unanimously to leave the target range for the Fed funds rate unchanged at 5.25-5.50% and Fed Chair Powell’s press conference was deemed less hawkish than feared.

Now, the Fed funds futures market isn’t pricing in any more rate hikes over the next 12-month horizon; in fact, it is pricing in at least two rate cuts over the next 12 months, according to the CME FedWatch Tool.

The sharp drop in rates acted as a springboard for stocks, aided by short-covering activity and a fear of missing out on further gains in a seasonally strong period for the market. Last week brought the S&P 500 into technical correction territory, but this week’s rally brought the S&P 500 back above both its 200-day and 50-day moving averages.

The rate-sensitive real estate sector was the best performer, up 8.6%, followed by the financial (+7.4%), consumer discretionary (+7.2%), and information technology (+6.8%) sectors. The “worst” performing sector was energy, which still climbed 2.3% this week.

Looking forward, although the S&P 500 closed above its three-month declining channel top resistance with Friday’s move, it still has additional significant technical resistance near 4385 from the October 10-17 time frame. The Nasdaq 100, despite its 6 day surge, only managed to close near that resistance line and needs to extend to confirm the S&P 500 breakout on Friday.

In addition, the Transportation index (TRAN) and IWM (Small cap ETF) both closed at or very near significant overhead resistance, as well. So, next week appears to be technically quite important. Either they get a strong breakout, signaling that they are possibly embarking on a strong late 2023 rally, or the rally is halted in its tracks near key resistance at the Friday closes, and gets at least a pullback retracement of the move. We should be able to determine that shortly.

 

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The indices experienced an important technical week last week. Led downward by tech stocks, transportation, and small caps the indices suffered sharp declines and settled near KEY technical support, which if violated, might mean additional sharp losses may be about to follow.

However, after 5 waves down in typical Elliott Wave fashion they have reached critical short-term support near the bottom of their channels. Market breadth reached 10-week lows and are short-term oversold This is very similar to what we saw as the 2022 bear market went into overdrive to the downside. So the risk here is very real for an immediate downside extension and a more deeply oversold market.

As I had stated in the last couple of weekly briefings, I am still ideally looking for a more deeply oversold level on the McClellan Oscillator, a higher fear reading in The VIX volatility index, and deeper intraday negative TICK levels of downside intensity.

In the very near-term we are very oversold and could soon see a furious multi-day rally begin at any moment. However, it might be difficult to have a sustainable intermediate-term rally when there are only 26% of stocks on the NYSE technically healthy; until this indicator turns up in a decisive manner, all rallies should be viewed with extreme caution and suspicion.

The current correction in various parts of the equity markets has been catalyzed by the move higher on the long-end of interest rates, not by an earnings recession. Should the 10-year break above 5.20%-5.40% a parabolic blow-off in the 10-year toward 6% could come into play. That would obviously be quite negative for equities. Next weeks FOMC interest rate decision should be a catalyst for the markets and likely to cause extremely near-term volatility.

In Addition, What if Apple disappoints badly next week? Any break below the 200-day – $338.53ish – on the QQQs would catalyze further downside for the other indices. It might get very messy quickly should any such break occur. Extreme caution is advised over the next week or so, and my advice is to tread lightly until the market experiences an obvious selling climax or a dramatic upside reversal.

In any case, the bearish trend we are currently seeing is usually fertile ground for the next bull as new leaders emerge, quietly showcasing strong relative strength during such periods. My more extensive and detailed Weekly Market Wrap-Up Video always highlights the trends that are exhibiting the strongest relative strength patterns and technicals. Be sure to review that video for the possible best long ideas going forward.

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