“Let Me Count The Waves”

October 1, 2023

Weekly Market Outlook

By Keith Schneider


Equity markets have been under extreme pressure over the past month (-5% on average), hit by waves of selling. The divergence in performance YTD between the NASDAQ 100 (QQQ) and the Russell 2000 (IWM) is 33%, hitting extreme levels that we saw at market peaks like in 2000.

Mish compiled a list of issues overhanging the markets earlier this week in one of her dailies. Here they are in no particular order:

  1. China-trade wars and chip wars
  2. Oil and food inflation
  3. Strikes
  4. Government shutdown
  5. Corporate and individual bankruptcies on the rise
  6. Commercial real estate and banking
  7. Fed-rates higher for longer
  8. Political polarization
  9. Social Unrest-how far can folks be pushed economically
  10. Geopolitical concerns - Russia and how far will they go “

Directly looming over the markets this weekend is the Debt ceiling issue.  It needs to be lifted, and if Capitol Hill can‘t agree, a default is on the horizon, along with a government shutdown.

Additionally, If Capitol Hill cannot get its s***t together, a downgrade of US debt by ratings agencies will happen.

From a recent historical perspective, in 2011, stocks dropped by 11% from late July to early August before a debt ceiling agreement was reached, but then a credit downgrade hit anyway. Stocks were down 19% by mid to late October before recovering and rallying into the year-end.

We could see a similar pattern this year, but considering the staggering ($33 trillion) national debt that the US now owes, the stakes are much higher.  The world may not be as amenable to purchasing US treasuries, potentially raising the cost to borrow, and have a draining effect on the economy.

The takeaway is that prior debt ceiling issues were a great buying opportunity in the longer term, but that may not be the case now as domestic political issues are worse than ever and interest rates are at highest levels in well over a decade and still climbing.

Looking at markets through the eyes of one of the best Elliot Wave analysts out there (Jeffery Huge from Alpha Insights), the charts below indicate a major selloff is underway.

On a positive note, markets are oversold, sentiment and market internal indicators are looking overdone, so if we do get an agreement on Capitol Hill the market is primed to rally hard.

Another factor supporting a rally is that is the Calendar range effect that is extremely positive starting shortly as shown on the charts below:

We have compiled a special free report on the impact of Monthly Calendar ranges that you can download here: marketgauge.com/calendar-ranges

As I am writing this, (Saturday afternoon) the House just passed a 45-day funding bill, so now it is in the hands of the Senate.  At this point, odds are more favorable that we will get that extension, so equities should rally, and we pause on the wave three decline… at least until higher rates impact the rollover of trillions of US debt.

This week we will not be doing a video and suggest you delve into the special report above.

 

 

Here are this week’s Bullets:

Risk-On

  • Market Internals got oversold on last week’s selloff and now the McClellan Oscillator is showing a potential divergence for both the S&P500 (SPY) and Nasdaq Composite ($COMPX) having already bounced ahead of a move in price. (+)
  • Risk Gauges have flipped back to completely Risk-On thanks to pressure on interest rates and Gold. (+)
  • The number of stocks above key moving averages got oversold on a short-term basis and is now bouncing. (+)
  • Even with the pressure this week, 4 of the 6 Mish’s Modern Family members improved relative to the S&P500, with the best performer being Semiconductors (SMH) on good volume. (+)
  • Soft Commodities (DBA) broke down into a warning phase and is at risk of losing its relative outperformance against the S&P500. (+)
  • The Dollar (UUP) got overbought on both price and momentum according to the Real Motion indicator and may be subject to a correction. (+)

Risk-Off

  • Both the Dow (DIA) and Russell (IWM) continue to remain below their 200-day moving averages in Distribution phases while the Nasdaq (QQQ) and S&P500 (SPY) remain in Warning phases. (-)
  • The Dow (DIA) has closed below its 50-week moving average for the first time in 6-months. (-)
  • Some of the worst volume patterns that we’ve seen all year amongst the key US indices with distribution days significantly outnumbering accumulation days over the past 2 weeks and the Dow (DIA) displaying 0 accumulation days. (-)
  • Most market sectors were down on the week with the poorest performance being in Utilities (XLU), a clear reaction to interest rates. (-)
  • Top performers this week included commodities and Base Metals (DBB) as well as Oil/Gas (USO / XOP) indicating inflationary pressures. (-)
  • The 1-month vs. 3-month Volatility Ratio (VIX / VXV) remains negative. (-)
  • Foreign Equities (EEM & EFA) continue to lead US equities on a short-term basis, however, both EEM and EFA are currently at risk of crossing into Bear phases. (-)
  • US Oil (USO) continued to make new yearly highs this week while Gold (GLD) is selling off hard and broke down into a Bear phase. Gold is deeply oversold and could experience some mean reversion next week. (-)

Neutral

  • The typical historical relationship between Utilities, the S&P500, and Interest rates shows pressure on all parts of the system. (=)
  • The New High / New Low ratio is currently negative but oversold on a short-to-intermediate basis. (=)
  • The longer end of the yield curve (TLT) got hit hard this week and is oversold and subject to some mean reversion, but the long-term trend remains downward. (=)
  • Value stocks (VTV) gave up short-term leadership relative to Growth stocks (VUG). (=)

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