Could This Be The Buying Opportunity I Have Been Expecting?

This was the question I asked at the end of September as some felt the rally from the September 21^st lows was a turning point. However, in my analysis of the charts and market internals indicated the market had just rebounded back to resistance (see chart) and was ready to head lower once more.

From the September 24^th close at $373.33 in the Invesco QQQ Trust (QQQ) it subsequently dropped another 6% to a low of $350.32 on October 4^th. In the past three weeks, Goldman Sachs (GS) lowered their forecasts for GDP while the International Monetary Fund last week lowered its global economic forecast because of concerns over supply chain disruptions and inflation.

The growing investor “wall of worry” was a dominant concern as the third-quarter earnings season started on Wednesday. Early results are promising as “of Friday, 80% of the 41 S&P 500 companies that have reported third-quarter results have topped earnings-per-share expectations, according to FactSet”. Additionally, Retail Sales were up 0.7% Friday when most were expecting a decline of 0.2%.

The markets relished the news as all the averages recorded solid gains led by the Dow Jones Transportation Average up 3.8% followed by a 2.2% rise in the Nasdaq 100 Index. The S&P 500 edged out the Dow Jones Industrials 1.8% to 1.6%.

Even the Dow Jones Utility Average rose 1.6% and while the SPDR Gold Shares (GLD) dropped sharply on Friday it still managed a weekly gain of 0.7%. There was even more positive news from the NYSE as there were 2395 advancing issues and just 1082 declining. In the prior week, the advancing and declining issues were about equal.

For the past few months, there have been signs of technical deterioration that were warning of a market correction. As the S&P 500 and Nasdaq 100 were making new highs in July and August, the majority of US stocks were declining. When the NYSE Composite finally made a new high in August (line a) the NYSE Stocks Only A/D was making lower highs, line b.

The market rally last week has put the A/D line in a short-term uptrend, line c. To signal that the market’s correction is over the resistance at line b needs to be decisively overcome. There have been other signs of improvement. The number of NYSE Common Stocks making New Highs had been declining (line d) but on Friday there were 205 New Highs, the best reading since early September. While the S&P 500 and Nasdaq 100 have been correcting fewer NYSE stocks have been making new lows, line e, which is also a positive sign.

The Invesco QQQ Trust (QQQ) gained 2.15% last week as the late week rally was suggested by the market internals after Wednesday’s close (see Tweet). QQQ closed back above its monthly pivot at $365.95 but is still below the former uptrend, line a, and the daily starc- band at $373.83. Remember that once support is broken it then becomes resistance. The 20 day EMA is at $364.09 with last week’s low at $356.80. There is longer-term support at $353.12.

The Nasdaq 100 A/D line has overcome its downtrend, line b, which is a bullish development. The WMA is trying to turn higher and once it is rising more strongly it will support the view that the worst of the selling is over. There is strong support for the A/D at line c.

Once the correction is complete, which may require another wave of selling, it should set up a better risk buying opportunity. Since before the S&P 500 or Nasdaq 100 peaked out at the start of September I have been expecting a market correction that would create a more favorable buying opportunity. There are two sectors that started to bottom out in the past month and look ready to be the market leaders once the stock market has resumed its major positive trend.

Given the warnings about what the supply chain disruptions are going to do to holiday shopping, it is hard to make a fundamental argument for why the Consumer Discretionary Select (XLY) should go higher. In contrast, the technical indicators have been positive for the past month.

The Consumer Discretionary Select (XLY) was up 3.49% last week closing at a new all-time high while the S&P 500 is still 1.45% below its record close. Three of the past four weeks the 20 week EMA, now at $180.43, has been tested. The completion of the three-month trading range has upside targets in the $196-$198 area.

The weekly relative performance (RS) moved above its downtrend, line b, in early September and was definitely rising and positive on September 17^th, line d. Volume increased sharply the week ending September 17^th as the pattern of lower highs, line a, was broken. The On Balance Volume (OBV) moved above its WMA in July, breaking above the downtrend, line c. It continued to improve in August and by September 17^th, line d, was strongly rising.

Since last month I have also liked the Vanguard Financials ETF (VFH) which I prefer over the Financial Sector Select (XLF) that I discussed in mid-August (see chart). VFH has 395 holdings while XLF has just 65 holdings. This gives VFH greater diversification, but it is also much less liquid trading on average 600K shares versus 49 million in XLF.

The strong close last week in VFH completed the trading range, lines a and b, which has upside targets in the $102-$104 area. The RS has moved well above its WMA which is now starting to rise. The OBV is positive but does not show as strong a pattern as the RS. Many of its top holdings have already reported earnings but as the earning’s season continues, I would look for the volume pattern to improve.

Using data on individual stocks as of Friday’s close, 54% of the S&P 500 stocks closed above their 50 day SMA. This reading was above 70% at the early September high and dropped as low as 26% two weeks ago. This makes for a much more attractive stock-picking environment and in my regular weekend scan of the S&P 500 stocks, there were 80+ with new bullish signals.

On a short-term basis, I would not be surprised to see another round of selling but I think now is the time to be finding new stocks and ETFs to buy but would not chase prices. The risk versus the reward heading into the end of the year has finally become more attractive. There were also over 40 ETFs that had positive momentum and QPivot analysis last week.