Welcome to the Show!
Best Seasonal Sector Investments.

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Welcome back and thanks for your loyal support of this weekly column.  This past Tuesday, October 1, 2024, we welcomed the beginning of the 4^th Quarter, typically the start of the best quarter for investing in the stock market.   See the chart below for October-November and December average performance of the S&P 500:

Welcome to the show reminds me of a popular song from the 1970’s (my era) group Emerson, Lake & Palmer. They were one of the biggest bands at that time.  You may have heard the song “Welcome Back My Friends To The Show That Never Ends.” You can click here to listen to it.

Welcome Back My Friends To The Show That Never Ends:
(here are the lyrics from part of the song)

Welcome back, my friends
to the show that never ends.
We're so glad you could attend!
Come inside! Come inside!
There behind a glass
stands a real blade of grass
be careful as you pass.
Move along! Move along!
Come inside, the show's about to start
guaranteed to blow your head apart
Rest assured you'll get your money's worth
The greatest show it happens a hell-of-alot.

You've got to see the show, it's a dynamo.
You've got to see the show, it's rock and roll
Right before your eyes,
We'll pull laughter from the skies
And he laughs until he cries,
then he dies, then he dies

This upcoming quarter will certainly be a dynamo.  Important variables that could highly influence the upcoming quarter’s investment landscape.

These include: a National Election with significant consequences as to which party rules the Executive Branch, Congress and the Senate.  We have potential continued easing by the Federal Reserve (or not).  We are mired in several geopolitical conflicts which could spiral out of control and pull the United States into a more active role.  And, we have an upcoming earnings season starting soon that should provide more clarity on earnings growth, company’s projections for 2025 and if their expectations will continue to blow past estimates.

Of course, we also have beautiful fall foliage, the Major League Baseball playoffs (note my Cleveland Guardians are in the thick of these), NCAA College and the NLF Football, the NBA starting, Halloween, Thanksgiving and of course Christmas and Hanukkah.  It usually is the most festive and joyful time of the year!

One variable that is also helping to fuel the worldwide stock markets and providing additional market liquidity is the global interest rate easing going on around the world.  We addressed this specifically in last week’s Market Outlook when we described the recent stimulus provided by China.  If you have not had a chance to read it yet or wish to review it, you may go here.

Update on the week’s Market action: (some data provided courtesy of Gorilla Trades):

The Dow and the S&P 500 pulled back after hitting new all-time highs the week before, with the Nasdaq and the Russell 2000 showing relative weakness amid a “risk-off” shift in investor sentiment.  Treasury yields continued their post-rate-cut sell off.  The 10-year Treasury bonds hit their highest levels in nearly a month, with the benchmark 10-year yield closing near 4%. This was predicated by Friday’s job market surprising report showing payrolls surging higher by 254K and the JOLTS job openings estimate jumping back above 8 million.

The Dow and the S&P 500 went on Friday to record fresh record highs.  See graphs below:

Despite the Dow and the S&P 500's fresh record highs this past week as well as the NASDAQ hitting fresh new recovery highs, bulls were on the defensive as October kicked off with a surge in volatility in most asset classes.  The quickly escalating Middle East crisis weighed heavily on investor sentiment as a broader conflict between Israel and Iran and its proxies looks more and more likely following this week's developments.

Economic Indicators

Non-farm payrolls, hourly earnings, the unemployment rate, the JOLTS job openings estimate, the ADP payrolls number, the Chicago PMI, and the Ward’s vehicle sales report all made bulls smile, with the critical ISM services PMI scoring a 19-month high of 54.9. On the other hand, the ISM manufacturing PMI slightly missed expectations, with construction spending and factory orders edging lower as well, as the manufacturing sector continues to lag the consumer economy.

While the week's key economic releases were mixed, the job market sent bullish signals, and several forward-looking measures provided sizable positive surprises, so it is no surprise that rate-cut odds continued to slide despite the geopolitical tensions and the lingering global growth fears. It is looking possible that after the big rate cut of 50 basis points in September, the Fed may either take a smaller than had been expected rate cut this quarter, or now many analysts are even predicting that they don’t follow up their rate cut with any additional cuts for the remainder of 2024.

Oil prices surged this past week. 

Earlier in the week, stocks turned lower across the globe as crude oil surged, with the dollar also gaining ground due to the increased safe-haven flows.  Crude oil surged by double-digits after Iran launched a retaliatory missile attack on Israel, triggering a global selloff in risk assets, with only the energy sector and defense stocks enjoying tailwinds

Here are a few charts on energy as the Oil markets broke above a descending trend line.  See chart below:

The Energy Sector (XLE) had its best week in nearly two years, rising +6.9%. It outperformed by a wide margin and broke out of a six-month downtrend. Crude Oil also had its best week in over a year, rising 9.1%.  Heading into this past week, Energy (XLE) was the worst performing sector YTD 2024.  However, it rose to 7^th place (out of 11 sectors) after closing higher every day this past week.

The recent move in the energy sector, especially crude oil has helped reignite the recent positive action in the commodities markets.  Notice the recent bounce off support in the S&P Commodities Index (below).  This is confirmed by the past 4-week move we have seen in the Bloomberg Commodities Index as well.  See charts below:

Where are we in the US stock market cycle?

After a week of geopolitical uncertainty, oil prices spiking and the nervousness of the Friday jobs report, the US stock market recovered with a robust day on Friday as we saw the S&P close at new all-time highs.

As you are probably aware, we have remained positive most of the year.  Last week we went through some of the reasons that the stock market could/should continue higher.  These included positive earnings growth, lower trending inflation, the Fed’s induced interest rate cuts, increasing productivity in the US and future optimism that AI will make American businesses more efficient.  Again, if you wish to review what we said, you can go here to reread the Market Outlook from last weekend.

As we enter the 4^th quarter, clearly there are factors providing additional wind at the market’s back.  This is illuminated in several readings recently published by other analysts.  One of those is the important euphoria and panic indicator.  See chart below:

Panic vs. euphoria. "Most indexes near all-time highs, yet investor enthusiasm remains muted. Does NOT mean we can’t get a meaningful pullback. BUT does suggest that we are not at a bull market top."

Recently, we have heard from a few clients and subscribers that they wondered if we thought the “bull market” has gone on too long, especially without a significant correction.  This may be true, but this market (and earnings) has defied traditional expectations as it continues to climb higher.  Many investors are waiting to get the “pullback”.   Other writers point out that there is some degree of “worry” now in the market and it seems to be climbing the proverbial “wall of worry.”  At the first sign of weakness, investors have been raising cash and they find that the market has another leg up and they need to put the $ to work to not trail too much.

Absent any shock, albeit a recession or some major conflict that comes about in this country or elsewhere, there is nothing to hold back this market at the current time.  Also, remember that many smart analysts and economic prognosticators have been upping their end-of-year S&P 500 targets to 6,000 or higher recently.

We thought that the following chart was appropriate at this juncture given that many are starting to believe the market has been positive for a bit too long.

Cyclical bulls. "Bull markets do not die of old age ... The table [below] underscores NDR’s view that absent a Fed policy error, hard landing, or external shock, the path of least resistance is a continuation of the bull market."

And while October during election years can be a bit volatile, any minor pullback will likely be met with buyers who step in to be positioned to take advantage of the remainder of the 4^th quarter.  Scott Rubner from Goldman Sachs also put the following chart out this past week, which we thought was very constructive.

SPX seasonality. "I am bullish on US equities for a year-end rally starting on October 28th. I am worried that my 6K target is too low."

Last, retail investors who have been heavily participating in the 2024 rally in stocks, do not appear to be losing any of their enthusiasm, given what the below chart indicates:

Retail investor sentiment. "The number of times we've seen more bears than bulls over the past year has dropped to its second lowest level in the past 20+ years and pessimism is still fading."

The metal markets.

Given the strong conviction that Mish had throughout 2023, and as she has remained steadfast that her followers take a position in Gold and Silver, we offer the following two charts.  (Please note if Charles Payne is reading this, remember all the appearances when Mish told your large national viewership to make sure and buy Gold and Silver?).

Gold. "The precious metal is having one of its best years on record."

Best seasonal index sectors to invest in:

We are postponing our new Fun Facts for a couple of weeks.  The reason this week is that we would prefer to provide you with the best seasonal sectors to invest in as provided by our friends at Stock Trader’s Almanac.  (the other reason is that I won’t be writing next week’s column due to the Jewish holiday).  See the best seasonal index sector ideas below:

We hope that we have shared information you find not only useful but actionable.  We believe that the table above may provide you with some ETF sector ideas that you can put to work.

As always, thank you for reading this column.  Make sure you read Keith’s Big View bullet points below and WATCH the videos.  The feedback we get about his videos is very positive.  Of course, if you have ANYTHING to share with us (good or bad), please feel free to contact us directly at [email protected] or [email protected].

Have a productive and profitable week ahead.   Stay safe out there.

 

 

 

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.

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Risk On

• After the initial drop from geopolitical stress, markets rebounded and basically closed flat for the week after testing critical support, especially noted with IWM, which closed Thursday on the 50-Day Moving Average and then rejected it on Friday closing up 1.4%. (+)
• Volume patterns, for the most part, remain positive across the key indexes. (+)
• By the close of the week, KRE regained its bullish phase, putting four out of six members of the modern family in bullish phases. (+)
• Both value and growth remain in strong bull phases with value closing at new highs on Friday. (+)
• Emerging markets closed at new highs for the year and outperforming the S&P over the last couple of weeks. (+)
• The color charts improved significantly across the board and look strong over shorter and longer term readings. (+)

Neutral

• Nine out of the seventeen sectors closed lower on the week with the strongest sector being utilities led by big gains in VST and CEG (holdings in our trading models). (=)
• Energy was one of the big leaders this week with USO up over 8%, XLP up 7.2%, and XLE up 6.8%, some of it attributed to potential disruptions with Middle East tensions. (=)
• Mixed reading from the NYSE New High New Low ratio as the short-term averages pulled off a little while the positive longer-term trend remains intact. The Nasdaq Composite is even more negative with the short-term crossing below the longer-term average. Sell signals when the market is above key moving averages tend not to be reliable. (=)
• Risk gauges remain a strong neutral and any additional strength in the S&P vs Gold could turn the gauge to risk-on. (=)
• USO regained a bullish weekly phase with two supporting factors: the economy seems stable and strong and potential risks to oil facilities in Iran. (=)
• New weekly high close in Gold, though overbought and subject to some mean reversion. (=)
• After hitting new 2024 highs and being overbought on a short-term basis and subject to mean reversion, DBA pulled off. Watch to see if DBA will need to hold its 50-Day Moving Average at $24.72. (=)
• Both cash volatility moved up into a bull phase and 1-month vs 3-month also weakened. So, despite the neutral performance in the market, volatility remains at elevated levels. (=)
• With the improved economic reports, the market is indicating that further interest rates may be less likely and yields across the board came off. Short-term rates moved out of its bullish phase for the first time since early July. (=)

Risk Off

• Despite a flat close on the week in the indexes, the McClellan Oscillator flipped negative for both the S&P and NASDAQ. (-)