Market Outlook 10-8-22
Seasonality, Sentiment & Strongest Sector/Industry with Some Chart Setups
Good afternoon investors and traders,
What a week. Headlines galore and lots of noise. Amongst all the noise, there has been a robust sector, which is no surprise: Energy—more on this below.
Today I wanted to do a follow-up post to the September 18th post. If you didn’t read it yet, the link is below.
To follow up on that post, I’ll focus on three things today:
Seasonality (there is a shift!)
Sentiment
Strongest Sector & its leading Industry
Major ETFs
SPY
The seasonality shift is here; last week was the pivot from bearish to bullish.
Note: I am not saying the market cannot go lower—what I’m saying is the seasonality has shifted, and historically, the upcoming period through March has been very bullish.
QQQ
Each rally attempt this year has been rejected at a prior volume spike, which is why I track these levels.
There is an objective distribution count of $248, just above the pre-COVID highs of $237.
The objective doesn’t necessarily need to be achieved for things to turn around, but it is worth monitoring, especially considering its proximity to those pre-COVID levels. It could be a shakeout or base level from which QQQ works.
IWM
I’m skeptical and cautious of IWM below the pre-COVID levels
There are counts on both sides, about equal distance apart from Friday’s close
DIA
Like IWM, the Dow Jones 30 ETF is below the pre-COVID highs. After last week’s strong rejection and long wick above the candle, things aren't looking so good.
The charts by themselves aren’t looking good. There is no denying they look terrible and need some reversal before they instill any confidence. But the seasonal winds are shifting, and for what it’s worth, it has been a solid six-month period from Oct-Mar.
Sentiment Check
Just in time for the seasonal shift, the sentiment has been weak.
In that regard, there are two things I wanted to share today:
CNN Fear and Greed Index
CPCE (CBOE Options Equity Put/Call Index)
First up, the CNN Fear & Greed Index:
A slight improvement from last week’s 15 print, it is still in the “Extreme Fear” range.
Are enough people scared yet?
Second, the CPCE
Note: In the SPX chart below, I’ve plotted the 10-week SMA of the CPCE index and added it to the bottom for comparison.
I’ve used the 10-week moving average for CPCE to smooth it out.
This method of measuring sentiment has been pretty good at calling the local and extreme bottoms for SPX. Look for the spikes and high prints and compare them to the bottoms over the last five years.
To recap so far:
Seasonality shift? Check
Sentiment at extremes? Check
What has been leading? Energy! I learned to track the leaders because they have the best potential to outperform when the market eventually turns (and eventually it will).
Energy
Sector Scans
As I shared then, I’ll include the same scan of all sectors (the 21-day % change):
It’s clear: Energy is the leader.
Several weeks ago, I called it out as a leader in the September 18th Market Outlook post. Since then, it has been up 2.5%, while SPX is down 6%. Quite a difference and the relative strength is noteworthy.
The monthly chart of XLE relative to SPX is below:
Is there room to run? Yes—I think so!
Within the sector, there is a leading industry: Oil & Gas E&P
Note: E&P stands for Exploration & Production
Here are some filtered leaders in that group:
The above basket has some fantastic setups. There are high & tight consolidations on the monthly timeframe, above rising 12-month SMAs.
Below are charts of three:
COP
MUR
HES
As can be seen, there are some key levels to watch for, and the tight consolidation (on the monthly scale) indicates potential for explosive moves. These things usually resolve in the direction of the prevailing trend, which is up. I am prepared just as I was for the Basic Materials (ascending triangle setup) and Small Caps moves shared in 2020.
It’s not guaranteed, but it is the best-looking sector of the thirteen at the moment.
I am already long a couple of Energy sector stocks, and I may be adding some more exposure soon (stock and options). These trades are always shared with subscribers as I take them.
Have a great week,
Trace