Phases & Cycles Market Outlook – November 03, 2020
This is the 500th Market Comment we have published since our humble beginning in 1990; and last month was also the 30th anniversary of Phases & Cycles.
Our most recent Market Comment (20 October, 2020 – SPX 3,443 and TSX 16,273) put forward that “numerous reliable indicators suggest an important low point for the end of October”. As expected, within three days, both the S&P 500 Index (SPX) and the S&P Composite Index (TSX) began a sharp sell-off that brought the former to 3,270 and the latter to 15,580 (5.0% and 4.3% declines respectively). Is that all there is, or is there a probability of further decline? We will answer later, but first a look at the usual time-frames.
The long-term outlook has not changed despite this short-term move, suggesting that after the current negative period concludes (just a small correction in the long-term picture) the secular bull market should continue to rise as it has (since its beginning in 2009) for the last 11 years.
The mid-term picture (see charts overleaf). The SPX rose from its March low (C) to a September high (D), followed by a sell-off to the late-September low (E). Another rally, which almost reached the early September high (F) then gaveway to a recent sell-off (G) which has declined almost below the late-September low.
Because the (D) high is approximately equivalent to the (F) high, some analysts call this a “double-top” formation. However, to be a true “double-top”, the decline to (G) should have by now fallen below (E) and it should have developed an over-sold status. Had this occurred, then the SPX would be, by now, below the 1/3 correction of the March-September rally (i.e. 3,125), or at the next support level at 3,000.
However, another possibility presents itself: the SPX holds (approximately) the low of September 24th (3,200 - E) and not rise higher than ±3600 (D or F). In this case, market action will closely resemble a “horizontal trading range”; which could continue for a while (probably until the presidential winner is clearly announced). But this should also be preceded by an over-sold condition.
Which one seems more plausible? Will there be a sell-off (double top) before a new high, or some meandering market activity (trading range) which will eventually get some strength and turn into a rally?
To get an answer, let’s look at the short-term picture. But first, let’s remember that one of the criteria to create a rally is to have an over-sold condition. Does this exist?
1) An over-sold market has numerous 1- to-10 outcomes between the Advancing and Declining stocks, as well as between the Advancing and the Declining Volumes. Such an event did occur on Wednesday, October 28th (361 Advancers vs. 3,639 Decliners and 119M vs. 1,042M Volume), but not since then.
2) On September 3rd (D) and October 12th (F) the percentage of NYSE stocks above their 10-week Moving Averages (10wMA) was 77.1 and 68.3 (courtesy of Investors Intelligence). At the two following lows (E and G) the readings were 35.7% and 43.6%. None of these readings suggest an over-sold condition (for comparison, at the March low the reading was ±10%).
3) Another signal of an oversold market is when there is a lack of new 52-week highs among the New York listed stocks for a number of days. There was only one day recently (October 30th) when this happened.
4) The VIX (please see my recent report on the VIX) began to rise as the SPX fell from F to G, and reached highs of 40.8, 41.2 and 41.4 during the last three days of October. No sharp highs and definitely no sharp declines on Monday as the SPX closed up over 40 points and the VIX declined a measly 0.89!
Short-term outlook. The statistics above show the lack of over-sold conditions. The VIX has not yet given a positive signal, the usual end-of-October seasonal signal did not create a sudden spurt in the last few days, and we are facing a difficult election. Therefore, for the short-term, a “wait and see” position would be the best solution. Should there be numerous 1-to10 days (1), a quick drop in the 10wMA statistic (2), no new 52-week highs (3) and a signal from the VIX (4), there will be plenty of time to participate, to commit funds, and invest with confidence.
PAC-20-187; MKT-500; November 3, 2020
Ron Meisels
Phases & Cycles Inc., 4000 Boul. De Maisonneuve West, Suite 2010, Montreal, QC H3Z 1J9
Tel.: (514) 393-3653 E-mail: RonMeisels@phases-cycles.com
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Article written by Ron Meisels, Phases & Cycles Inc., on November 03, 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®