Stocks last week finished the month of October and at the same time also started into the month of November with a continued firm tone. With seemingly few known knowns (economic, corporate and political data points) bothering portfolio managers nor the retail investing community, stocks could indeed continue to hold a bid into year-end, although it would be surprising to see selectivity and volatility not increase somewhat from here on forward.
The month of October is behind us, and the first month of the fourth quarter has seen unusually low volatility not just in equities but also in other asset classes. In the bigger picture I am indeed concerned about the palpable change in posturing on the part of g4 central banks from a period of accommodation to a period of tighter monetary policy.
But this shift could take more time until it gives stocks notable digestion issues.
As a result of the unusually low volatility squeeze higher in stocks through September and October, I am now, however, pondering whether we have already seen the majority of gains of a year-end rally, at least as far as the S&P 500 as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is concerned.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
The multiyear chart shows that the SPY ETF is now and has been for weeks at the very upper end of a longer-standing trend while the most recent leg higher has come on waning upside momentum as per the RSI indicator at the bottom of the chart. None of this means that the S&P 500 from here has to swan dive lower, but it does continue to worsen the reward to risk on new long positions in my opinion.
In last Monday’s missive, I offered two themes that I will once again reiterate at the start of this week;
- Small-capitalization stocks, as a function of strength in financials and energy stocks, could see relative out-performance into year-end versus their large-cap cousins
- More upside in energy stocks into year-end (for now) could come with continued strength in the price of oil and thus higher inflation pressure.
For a detailed update on my latest fourth-quarter trading and investing themes I am holding a special webinar on Nov. 6. You can register here.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
With many of the all-important large-cap technology stocks having reported earnings one part of the technology sector that looks particularly overbought for now is the semiconductor stocks. On the below chart note that this segment as represented by the VanEck Semiconductor ETF (NYSEARCA:SMH) is now trading firmly above its multiyear trend. Consolidation in price (lower) or in time (sideways) is now desperately needed for semiconductor stocks as a group.
In summary, increasing selectivity in the stock market is one of my themes from here on into year-end but with a still positive undertone in the broader stock market. As a side note and something to keep a close eye on, should one of the large cap tech names like an Amazon or an AAPL starts to slip it could cause at least a temporary snowball effect for the broader US stock market.
Check out Serge’s Trade of the Day for Nov. 6.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
Tell us what you think about this article! Drop us an email at editor@investorplace.com, chat with us on Twitter at @InvestorPlace or comment on the post on Facebook. Read more about our comments policy here.
Take Serge’s quiz to find out which trading strategy best suits your personality.
