Summary: US equities continue to make new all-time highs (ATHs) and the outlook into year-end is favorable. This week's interim fall of nearly 1% followed by a strong rise into the close demonstrates the market's continued resiliency. It might also indicate waning upward momentum. There remain a number of reasons to suspect that more weakness is ahead, although this is likely to be only temporary.
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SPX, COMPQ, NDX and DJIA all made new ATHs again this week (on Wednesday). The dominant trend remains higher. Enlarge any image by clicking on it.
The set up coming into this week was the following:
Persistent strength, which has an overwhelming tendency to carry the indices higher within the next month(s) and into year-end.
An extended trend, with some deterioration in breadth and compression in volatility, which most often leads to a lower weekly close within the next two weeks.
Details are in this post.
In the event, SPX was nearly 1% lower by Thursday, which amounts to an extreme in the current environment. It closed the week off just 0.1%. The Dow and the NYSE lost 0.5%. NDX closed 0.2% higher; it leads, which is normally a positive overall for US equities.
So what happens next?
For most investors, the focus should remain on higher prices. Throughout the year, we have been highlighting a considerable list of positive studies suggesting that US equities will likely finish the year higher. Some recent studies include these:
SPX has risen 7 months in a row. Since 1980, none of the prior 7 month streaks marked a significant top, with SPX rising during the 8th month 63% of the time.
When SPX has risen more than 8% during the "weakest 6 months of the year" (May-October), it has then risen an average of 12% in the next 6 months, up 91% of the time.
The current period, November-January, is considered the "best 3 months of the year," with SPX gaining an average of 4%.
In years like 2017, when there was not even a 5% correction during the "worst 3 months of the year" (August-October), SPX gained more than 4% through year-end, up 82% of the time.
A new study that complements the others is this: when SPX has gained at least 15% through October, it was higher within the next two months
every time. It closed higher at end of the year in all cases but one (a 94% historical win rate; from Ryan Detrick).
As we summarized last week: All of these studies suggest that US equities are not at risk of topping very soon. Any surprising interim weakness (which is always possible), is likely to be a buying opportunity. The first sign of weakness usually is. That remains our view.
With this week's lower close, a higher weekly close than last week is odds-on. Why? Because SPX had risen 8 weeks in a row heading into the current week. This has occurred just 10 other times since 1970. Within the next 2 weeks, SPX closed lower 90% of the time (weekly close basis) and interim risk/reward skews negative over the next 4 weeks. But note that SPX closed higher within the next 4 weeks 90% of the time, meaning, a higher close is now ahead. Any weakness in the days (or weeks) ahead is probably short-lived. Of note is that when Week 1 closed lower (like it did this week), then Week 2 usually closed lower, too (from @SJD10304).
There are, in fact, a number reasons to expect SPX to still test lower lows than this week before long:
Breadth momentum (NYSI) has been falling for the past 3 weeks, which has fairly consistently led to declines of at least 1-2% in the index.
The one-month weighted equity only put/call ratio recently dropped to a multi-year low, indicating excessive bullish behavior among investors, which has most often led SPX to it's 50-dma or a loss of as much as 5%.
SPX has tagged "round number" resistance at 2600 after which the index has had a high propensity to correct at least 2%.
The trading range for SPX has tightened significantly in the past month, which has typically been followed by a pop in volatility. Many times SPX moves to its lower Bollinger Band, about 2% lower.
The seasonal pattern during November is weak mid-month. Note the low in the past week (Day 7 was Thursday) is usually revisited within the next two weeks (from Stock Almanac).
The drop on Thursday and early Friday put SPX below its 5-dma for just the second time in the last 5 weeks. Uptrends weaken before they reverse, and this is a possible indication of waning momentum. Both lows recovered on the rising 13-ema. Repeated hits to the 13-ema (highlighted sections) often lead SPX to break lower to its 50-dma, now near 2540 (arrows). This is now the main short-term tell on trend.
Timing any weakness in the current market environment remains a significant challenge. Economic data remains firm. Corporate results have already been released and were good. That means any jump in volatility will likely be due to a political event (geopolitics or domestic legislation, like taxes). These are especially difficult to successfully anticipate.
In summary, US equities continue to make new ATHs and the outlook into year-end is favorable. This week's interim fall of nearly 1% followed by a strong rise into the close demonstrates the market's continued resiliency. It might also indicate waning upward momentum. There remain a number of reasons to suspect that more weakness is ahead, although this is most likely to be temporary.
The macro calendar this week is highlighted by CPI and retail sales on Wednesday, industrial production on Thursday and housing starts on Friday. Friday is also option expiration: November OpEx does skew positive, rising 70% of the time by a median of 0.9% since 1994.
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