Monday’s performance of 2% on the S&P 500 was a difficult performance to follow on Tuesday, but stocks held up well ahead of what is sure to be a slow day on Wednesday ahead of the Thanksgiving holiday.
Last Friday’s intraday upside turnaround coupled with Monday’s massive rally was enough to put a solid bottom or at least reference point in place for stocks. On the S&P 500 that reference point is 1345, which also happened to be the 61.80% Fibonacci Retracement of the entire June – September rally. The hammer candlestick from last Friday November 16th, coupled with Monday’s follow-through buying, all converging at an level where the McClellan Oscillator was heavily oversold is an occurrence investors must note.
The sharp reversal left its mark on index and stock charts all across the U.S. and European stock markets. The Dow Jones Transportation Index for example found support at its June lows and also left a powerful hammer candle on its daily chart.
From a sector perspective things look promising as well. The October – early November correction in stocks was led in part by defensive sectors, which is another way of saying that cyclical sectors outperformed on the way down. In real risk aversion mode the opposite would have happened, and the fact that cyclical sectors outperformed during the correction is a sign of underlying strength in the broader market. The chart below shows utilities and consumer staples stocks under-performing the more cyclical industrial sector as well as the S&P 500 itself.
If the above indicators aren’t entirely fooling me, then I would expect the cyclical sectors, technology being one of them, to start outperforming the S&P 500 over the coming weeks. The below chart (green part) shows the ratio of the Technology Select Sector SPDR etf (XLK) to the SPDR S&P 500 etf (SPY). As technology has underperformed the broader market over the September – October period this ratio has declined. Should technology become a relative outperformer again then this ratio and the green chart will increase, giving me further confidence in a more sustainable market rise into the first quarter 2013.
Last and maybe most importantly, the U.S. Dollar Index has developed a topping pattern right at its 50% retracement of the July – September dollar sell-off, and not coincidentally right as stocks started to rally last Friday.
Given the above points, I remain constructive on stocks in to the year-end and possibly into the first quarter 2013.