Should You Join The Stampede?

In terms of stock traders October ended on the 27^th as the expected oversold rally got underway last Monday. The prior week’s 2% decline in the major average did not favor getting out of stocks on Monday. As I concluded last week “just 11% of the QQQ
QQQ
stocks are now above their 10-day MAs. This typically leads to a 2-3% rally in the next week or two.”

As it turned out the market moved higher every day last week and the 6.5% gain in the Invesco QQQ Trust (QQQ) widely exceeded all expectations. The dramatic shift in sentiment was not reflected in last Thursday’s AAII survey. The bullish % declined further to 24.3% from 29.3% the prior week while the bearish % is at 50.3% up from 43.2% last week. The Bull–Bear reading at -26 is below the extreme levels of -40 from last fall.

This was the increase in bearishness I have been looking for since September and the readings are likely to see quite a shift this coming week. This shift in sentiment was also mirrored in the CBOE volatility index for the S&P 500 (VIX) and for the NDX 100 (VXN).

Both are plotted versus the S&P 500 as the VIX peaked on October 20th and then formed a lower high on October 27^th, line c. This divergence was a bullish sign as it indicated a lower volatility level even though the average was also lower. The drop below its 13-period EMA indicated a new downtrend. The NDX 100 (VXN peaked a daily earlier on October 26^th and the QQQ was higher the following day as the divergence, line d, had formed earlier. The support from the mid-September lows was broken on November 1^st.

The turn in volatility coincided with the late October signs that yields were likely peaking out The lower yields were the catalyst that stock market investors were waiting for to trigger new buying. The major drop in yields was due to many concluding from Powell’s comments that he had stopped raising rates. Though that is likely it is not certain as he left the door open. Push back from the Fed could trigger a pullback.

The 10-year T-Note’s uptrend in yields, line a, was been reached with last week’s low of 4.486%. Yields had closed the prior week at $4.845%. There is further support on the chart at 4.362% and then at 4.094% which goes back to July. The lower highs and bearish divergence in the MACD, line b, had warned of a peak before it occurred. The steep decline last week in both MACD indicators does favor a further decline. A short-term bounce is possible first as the 2, 5, 10, and 30-year yields closed below their daily starc- bands.

The beaten down iShares Russell 2000 (IWM
IWM
) was the top gainer up 7.6% for the week followed by the 7.1% gain in the Dow Jones Transportation Average. Just behind QQQ, the S&P 500 was up 5.9% with a similar gain in the Utility Select which is still lower YTD.

Even the Dow Jones Industrial Average was up more than 5% while the SPDR Gold Shares was down 0.7%. The weekly market internals were also record-breaking with 2665 issues advancing and just 345 declining. The New High/New Low analysis was better at the end of the week but a change in the trend has not yet been confirmed.

The Spyder Trust (SPY
PY

SPY
) closed the week above the 20-week EMA as well as the 40-week EMA after breaking both the prior week. The October high at $438.14 has not yet been exceeded but the R1 for November at $434.19 was exceeded on Friday. The weekly downtrend, line a, is at $445.64 with the weekly starc+ band at $450.95. SPY was above the daily starc+ band for the past two days.

The weekly S&P 500 Advance/Decline line rose sharply last week but is still below its 21 WMA but it did close above the 21-week EMA. The weekly NYSE All A/D Line is positive as is the Dow Industrials A/D line but not the NYSE Stocks Only A/D line or the iShares Russell 2000 A/D line.

The Invesco QQQ Trust (QQQ) gapped higher the last three days which is more typical of a short squeeze. The 61.8% Fibonacci resistance is at $370.55 while the downtrend from the July highs, line a, is at $370.96. The early October high is at $373.74 and there may be last-gasp short stops above this level. The 20-day EMA has turned up at $358.52 with the pivot at $355.65.

The Nasdaq 100 Advance/Decline line dropped below the support (line c) on October 25^th and on October 27^th closed on the lows. By the close last Wednesday it was above its WMA and has now reached its key downtrend, line b. The gap with its WMA does favor a pullback. The daily relative performance closed the week barely above its WMA as QQQ did not lead SPY by much. The weekly RS does indicate that QQQ is a market leader.

In last week’s sector review, I zeroed in the four of the eleven sector ETFs that closed in October before their yearly pivot levels. This included a review of the monthly chart and technical studies that helped identify the market-leading sectors last January.

All of the eleven Sector ETFs were higher last week and the worst performer Energy Select (XLE
XLE
) was still up 2.4%. At the top of last week winners were some of the year’s weakest performers as on a year-to-date basis XLRE
XLRE
, XLV
XLV
, XLP and XLU
XLU
are still lower in 2023.

Two of the year’s top performers, XLY
XLY
and XLC were both up 7.1% last week and XLK
XLK
was not far behind at up 6.6%.

The best performers from last week are not the best way to pick your ETF for the year-end rally. Instead, I would focus on the weekly and daily relative performance analysis.

After last week’s action, the SPY and QQQ as well as many EFTs and stocks are extended on the upside. Some of the NYSE A/D indicators have quickly reached overbought levels so they also favor a 1-3% pullback so pick your entry levels closely. The FOMO from last week could last a few more weeks so be patient.