Phases & Cycles Market Outlook – October 05, 2020
Let’s review the market’s activity in September. In my August 28th Ron’s Brief I forecast a “market correction” based on the seasonally negative September-October period, the overbought condition of the S&P 500 Index (SPX), the upcoming Presidential election, the lack of a vaccine, that 73% of the Index’s stocks were still trading above their 10-week Moving Averages and that over 60% of Investment Advisors (as polled by Investors Intelligence) were bullish.
In our September 1st Market Comment we observed that the SPX was 12% above its 200- day Moving Average and that it “looks increasingly extended”. Within two days after publication, the SPX began a sharp decline from its high (3,588) and twenty-one days later on the 24th, after a 10.6% drop, the selloff culminated at the daily low of 3,209. At this stage, the SPX was still 100 points above its 200-day Moving Average. The month ended with a minor 1% rise to 3,348.
Did the 10.6% decline from 3,588 to 3,209 erase the overbought condition? Did the market have a selling climax on September 24th? In a recent Ron’s Brief we outlined five conditions needed to recognize a selling climax, the end of a correction. Only one of these indicators fulfilled the described conditions (that less than 10 stocks would hit a 52-week high): on September 24th there were only two stocks that did this. On the other hand, the highest reading for the declining vs advancing stocks was 2 to 1; the highest reading for the downside volume vs upside volume was 5 to 2, which meant that neither met the required 10 to 1 ratio. The VIX hardly moved from its daily parameter between 25 and 30, and the percentage of stocks above their 10-week Moving Averages remained in the 60% zone. In addition, the decline violated the up-trend channel (see next page) which has been in effect since mid-May. The only positive action we observed was that all the FAANG stocks have arrived at the requested 1/3 correction of their March-September rally!
Numerous “events” occurred last week: it was the end of the third quarter (the results of which are usually announced between the 15th and 17th of the following month); the first Presidential debate and President Trump marching into the hospital; all of which could confuse the technical signals. However, we believe that our forecast that the correction could continue, but end in October, is valid. Note that we continue to refer to September’s activity as a correction, since we continue to forecast a resumption of the bull market to commence at the end of the month (see below).
The sell-off has not met our five criteria nor did it reach our correction target of 3,125 (a one third correction of the March-September rally) which is coincidentally where the 200- day Moving Average will be at the end of October. Therefore, we expect a continuation of September’s decline, an increase of bearish news (maybe connected with the 3rd quarter results). Only a sudden upside breakout above 3450 would negate the expected sell-off to 3,125.
In Toronto, the S&P/TSX Index (TSX) reached a high of 16,835 on August 27th, 970 points and 6.1% above its 200-day Moving Average. It reached a low of 15,817 on September 24th (a 6% decline) and landed below its 50-day Moving Average but exactly where the 200-day Moving Average was at that time. Despite this good news, the Index is still somewhat above the 1/3 correction target of the MarchSeptember rise, which calls it to reach 15,000. In all likelihood the Financial and Energy sectors will mostly contribute to this final ±5% projected decline.
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Article written by Ron Meisels, Phases & Cycles Inc., on October 05, 2020,
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This article was prepared by Phases & Cycles Inc. and is not endorsed by HollisWealth®, a division of Industrial Alliance Securities Inc. The opinions expressed in this article are those of Phases & Cycles Inc. only and do not necessarily reflect those of HollisWealth®