The S&P 500 is within range of September’s inverse “head and shoulder” breakout
“When I identified the inverse bullish “head & shoulder’ breakout on the SPX in late September, I mentioned that the measured target is about 6,200, or nearly 10% above the neckline at 5,666. Since the breakout above the neckline, the SPX has rallied about 2.5%, following a three-week pause just after the breakout occurred.”
–Monday Morning Outlook, October 14, 2024
With the exception of last Monday’s opening gap higher on the S&P 500 Index (SPX — 5,864.67) to another all-time high, expiration week was pretty much a yawner with the rest of the week trading range-bound.
However, financial stocks kicked off earnings season and responded well, as the Financial Select Sector SPDR Fund (XLF — 47.62) made a bold move above its early September high to register a new all-time peak.
But the SPX experience failed to make significant headway after the Monday morning advance, as big-cap technology shares failed to make major headway. A big-cap benchmark, the Invesco QQQ Trust (QQQ — 494.47) is battling resistance in the $500 area, the site of a major round-number and area of its July high.
Despite expiration week being range-bound for the most part, the SPX is now 3.3% above the neckline that defined the inverse “head and shoulder” breakout after the Fed cut rates in September. In the weeks since this breakout, it is about one-third of the way to its projected 10% rally.
Additionally, not only is there a bullish technical pattern in place for the SPX, but there is a seasonal tailwind. An interesting statistic that I ran across last week was that from Oct. 15 through year-end during election years, median returns since 1928 for the SPX are 7%. Using this statistic, it would imply a move to SPX 6,270, well in the range of the 6,200 target for September’s inverse “head and shoulder” breakout.
“Corporate insiders have been reluctant to snap up shares of their companies. Of all U.S. companies with a transaction by an officer or director in July, only 15.7% reported net buying of company shares, according to InsiderSentiment.com. That was the lowest level in the past 10 years. The figure ticked up to 25.7% in August before falling to 21.9% in September, well below the 10-year average of 26.3%.”
–The Wall Street Journal, October 6, 2024
“…portfolio protection is roughly 50% above that of July, even though in both cases the SPX hit all-time highs. This caution in the options market is bullish from a contrarian angle….I continue to be amazed, even after a brief downtick in short interest in the second half of September, that total short interest on SPX component stocks is at levels not seen since fear gripped the market when the economy was shutting down due to Covid-19.”
-Monday Morning Outlook, October 14, 2024
Whether it is heightened demand for portfolio protection due to election outcome uncertainty among market participants – as depicted by a still elevated Cboe Market Volatility Index (VIX — 18.03) – or near multi-year highs in total short interest on SPX component stocks, insider apprehension, or active fund managers reducing exposure to the market during the past month, there are signs of caution abound. As I have said in prior weeks, such caution is a necessary ingredient to keep the rally going, as it represents future buying power.
One area of the market showing increased optimism is equity option buyers, as the 10-day, buy (to open) put-call volume ratio on SPX components is decreasing and around levels that have marked a few pullbacks in the market in the recent past. This group has been positioned wrongly at key short-term turning points, so this is something to keep an eye on and perhaps one of the bigger short-term risks.
One technical sign you might want to seek out in the context of this sentiment-based risk could be a bearish “outside day” candle, in which the SPX’s high of the day is above the prior day’s high, and the low and close is below the prior day’s low. Such days have tended to foreshadow imminent short-term weakness in the market in 2024 (last Tuesday was close to a bearish outside day, but the high of the day was not above the prior day’s high).
The bottom line is that amid seasonal and technical tailwinds, plus signs of caution in many areas of the market, the outlook remains bullish into the rest of the year, but bulls may get tested along the way. If sellers do overwhelm buyers in the near term, the first point of potential support is in the 5,725 area (20% above the 2023 close), where there was congestion immediately after the neckline breakout. The 30-day moving average has also moved up into this vicinity, a trendline that has been of importance multiple times since October 2023.
Todd Salamone is the V.P. of Research at Schaeffer’s Investment Research.
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