The October 2022 Baby Bull is Back and All Grown Up

October 13, 2024

Weekly Market Outlook

By Geoff Bysshe


I’m filling in for Donn this week so he can enjoy a much deserved break for this holiday weekend.

This bull market is ready for anything the election will throw at it, but which sectors of the market will come out ahead is a little less clear.

Here’s a way to navigate the uncertainty using sector rotation.

Next week will mark the 2-year anniversary of the Oct 15th 2022 low that marked the beginning of the current bull market. While this fact will get a lot of media attention this week, the more important message about (and from!) the bull market is how it’s dramatically matured over the last 60 days.

After reading this article, you may conclude that the bull market of today is much more like the bull market of October 2022, than the bull market we experienced from 2023 through July 2024.

For example, the breakout to new highs in the S&P 500 on Friday was yet another of over 40 new highs this year. However, the character of the recent new high records relative to those prior to its most recent correction high (September 16th) has been dramatically more mature.

This difference and maturity reflect the market’s answer to the never-ending debate around the questions of how the market is “pricing in” the expectations for earnings growth, GDP growth, inflation, the Fed, geopolitics, the outcome of the election, and more.

Every week, this Market Outlook looks at the market through the lens of many of those factors.

This week I’m going to let the market do all the talking by pointing out the market’s message as told by the absolute and relative performance of its sectors.

At MarketGauge we look at market sectors in a number of different ways. For example, Mish's Economic Modern Family approach focuses on 5 sectors and the Russell 2000 to capture the market’s message, and some of our sector summary tables in our services include 30 or more sector ETFs to track the market and find trading opportunities.

In this article, I’m going to use a specific set of S&P 500 sector ETFs (the 11 SPDR select Sectors by Investco), and a customized and less commonly used set of sector categories. Together this view provides:

  1. A representation of sectors followed by institutions without companies being represented in multiple sector ETF.
  2. The categorization of the sectors into 3 groups – Risk On, Risk Off, and cyclical. This categorization simplifies the market’s message from being told by the trends of 11 sectors to that of 3 primary trends.

The three categories Risk On, Risk Off, and Cyclical, are based on research I’ve adapted from Garrett Drinon at SMB Trading who advocates looking at the market in terms of Offensive and Defensive sectors.

The sector categories are constructed by averaging the performance of specific sectors as follows:

Risk On (Offensive)

  • XLK – Technology
  • XLC – Communication
  • XLY – Consumer Discretionary

Risk Off (Defensive)

  • XLU – Utilities
  • XLV – Healthcare
  • XLP – Consumer Staples

Cyclical

  • XLI – Industrial
  • XLB – Materials
  • XLE – Energy

Two sectors that are not in categories are XLF (Financials) and XLRE (Real Estate).

In a more detailed analysis than this article, you’d see that I find it insightful to let XLF on its own provide a message that can enhance the market’s explanation of the trends in any or all of the other three categories.

More importantly, listening to the market’s message in sector rotation is not a perfect science. I can hear readers second-guessing the categorizations. I understand and I encourage any skeptics to consider ‘suspending disbelief’ until the end of the article.

These three categorizations provide the benefits of a quick clear market message that far outweigh the energy required to dwell on the potential of missing nuances found in the analysis of all 11 (or more sector ETFs).

Furthermore, the nuances revealed by looking at all 11 sectors individually are more easily identified and explained with the Risk On /Off and cyclical foundation already laid. You’ll see this demonstrated below.

The October 2022 Baby Bull is Back and All Grown Up

In the chart below you’ll see the bull market depicted by the relative performance of the SPX, RSP (equal weighted S&P 500), and TLT, along with the Risk On, Risk Off, and Cyclical sector categories.

Vertical lines market the 3 market corrections that we’ll evaluate in this article and the 3 peaks in TLT during the period for context.

The S&P 500 (SPX) is shaded in green.

As you can see from the chart above the bull market kicked off with outperformance in the Cyclical sectors (XLI, XLB, XLE).

It’s also noteworthy that RSP outperformed SPX in the first several months.

In April 2022, interest rates bottomed (TLT peaked) and Risk On (XLK, XLC, XLY) sectors led the market higher with the support of the Cyclicals, but Risk Off (XLU, XLV, XLP) fell.

 

The First Bull Market Correction - July 2023

The first correction of the bull market (shown above) began in late July 2023 and it was led by the Risk On category. The Cyclicals resisted for about a month, but once it rolled over in September, the whole market was in correction mode.

The bottom of the correction was marked by an “everything reversal” – all sectors and TLT rallied, led by the Risk On category.

In December, Risk On was the only category that decisively reclaimed its July highs, and  TLT peaked along with Cyclicals and the leader – Risk On category.

However, and this point, Risk-Off (Defensive) category didn’t stall. It kept rallying which gave reason to believe the market’s new highs were likely to go higher rather than form a major top.

 

The Second Correction Turned Around With Risk Off Leadership

As you can see in the chart above the second market correction in April of 2024 was, again, led down by Risk On.

It was the Risk Off category that turned higher first and was unwavering in its move to new highs. The market bottom was clear when the Cyclicals and Risk On sectors joined the rally, but they took longer to recover than Risk Off.

In mid-May, leadership roles changed as both Cyclicals and Risk Off peaked, and it was Risk On that pushed the market higher into the summer.

Finally, in July all three categories were in bullish mode. Just in time for the July Calendar Range, and seasonally weak August period.

 

The July 2024 Correction

 

For the second year in a row, the market peaked in July (2024) as illustrated by the chart above.

This correction was different from the prior two right from the start in that the Risk Off category didn’t sell off at all suggesting that the market was rotating more than selling off.

The sharp tech sell-off tested this hypothesis but the Risk Off (Defensive) and Cyclical categories continued to outperform as Risk Off struggled.

Most encouraging was the continuation of the Cyclicals’ breakout to new highs despite TLT peaking and the Risk Off category turning down.

As we head into the uncertainty of the election and the historically bullish month of November, the market has demonstrated that it’s a it is a long way from its days of depending on the popular tech and Risk On stocks to maintain its uptrend.

It’s in a position to respond to earning season, and the outcome of the election with historically normal checks and balances in which news related to growth will drive movements in interest rates, and the three categories of sectors will price in their response accordingly.

As a trader or investor you can try to predict the news, predict how the market will respond to the news, or you can listen to the market and let the sectors show you what they’re thinking.

As the market has explained in its recovery from the last three corrections, when two or more of the three categories are trending, their direction is likely the one the market will follow.

The Risk On category has the ability to be an exceptionally powerful influence on the market indexes because of its market capitalization, but with Cyclicals leading and the equal weighted S&P 500 ETF (RSP) outperforming, the other two categories should now be considered equally important.

This is further supported by the fact that corporate earnings trends are currently positive and expected to continue (see chart below).

In this environment, it’s reasonable to expect that the market’s sector rotation, as depicted above, will be a very reliable indicator of what to expect next – right now, after the election, and into 2025.

If you are a member of our ETF Sector Plus system or All Access, you can find the Risk On, Risk Off, and Cyclical category indexes here. If you’d like to become a member, contact Rob here for a demo. If you’d like a free way to track the 11 Sector ETFs mentioned above, you can find them in the free sector summary section of Big View here.

If you have any questions, please feel free to contact me via the live chat on any of our web pages.

Best wishes for your trading,

Geoff Bysshe 

 

Every week we review the big picture of the market's technical condition as seen through the lens of our Big View data charts.

The bullets provide a quick summary organized by conditions we see as being risk-on, risk-off, or neutral. 

The video analysis dives deeper.


Risk On

  • Both the Dow and S&P made new all-time highs while the Nasdaq and Russell, just off their highs, also closed up on the week a little over +1% on average with all the indexes in full bullish phases and not at overbought levels.. (+)
  • Sector performance was mostly positive with more up than down, led by transports (+5.4%) and regional banks (+3.8%) and semiconductors (+3.4%). However, retail and consumer discretionary were down, giving a mixed to positive read. (+)
  • The number of stocks above key moving averages all confirm risk-on readings. (+)
  • Risk Gauges improved to risk-on. (+)
  • Value stocks hit a new all-time high and both Growth and Value are performing well in bull phases and relative performance is about equal across the board based on our Triple Play indicator. (+)
  • For the Modern Family, XRT and IBB regained their bullish phase. IYT exploded higher and KRE looks poised to take out a triple top developing since July. (+)
  • Foreign equities remained in a bull phase working off overbought reading from several weeks back with U.S. equities regaining its relative leadership. Important to watch for EFA to maintain its bull phase above the 50-Day Moving Average. (+)
  • Despite the Fed lowering rates last month, Interest rates have risen across the board with better economic numbers and inflationary pressures still simmering. If this is an indication of a more robust economy this could be perceived as bullish for equities, assuming current levels are held. (+)

Neutral

  • Volume patterns lagged the market and surprisingly, distribution days (4) outnumbered accumulation days (3) for the S&P. (=)
  • Mixed reading from the NYSE New High New Low ratio as the short-term averages continued to pull off a little while the positive longer-term trend remains intact. (=)
  • Both Gold and Oil rallied with Gold poised to take out it's all-time highs after digesting recent gains over the last few weeks. (=)
  • Both soft commodities and copper rallied on the week, maintaining bullish phases and indicating inflation is still present. (=)
  • Solar sold off hard for the week, possibly trying to read the political tea leaves. However, clean energy (PBW), had a strong day on Friday, closing up almost 3% on the week. (=)
  • The McClellan Oscillator seems to be a little out of sync with the market putting in new highs and still showing a neutral reading. (=)
  • The intermediate-term basis (the 50-Day Moving Average) color charts are showing a positive reading for the Dow, S&P, and the Nasdaq. However, we are getting a much more mixed read on a shorter-term basis, with sloppy action in the S&P and Nasdaq. (=)

Risk Off

  • Despite the markets closing at new highs, volatility levels remain elevated and the cash VIX remains in a bull phase. (-)

Stay One Step Ahead of The Markets and Profit
From The Current Volatility With Market Outlook

Keith Schneider

Every week you'll gain actionable insight with:

  • Unique analysis of themes driving the market trends, so you stay of the right side of the trends
  • Powerful inter-market analysis that reveals market turning points early
  • Big View charts and indicators that identify dangers and opportunities
  • Highlights of the most important economic trends, so you're on top of the news flow
Subscribe Now!
Geoff Bysshe