September Strategy Session: 3 Key Takeaways

Steve Strazza
September 9, 2022

From the Desk of Steve Strazza @Sstrazza

We held our September Monthly Strategy Session Tuesday night. Premium Members can click here to watch the recording and review the chartbook.

Non-members can get a quick recap of the call simply by reading this post each month.

By focusing on long-term, monthly charts, the idea is to take a step back and put things into the context of their structural trends.

This is easily one of our most valuable exercises as it forces us to put aside the day-to-day noise and simply examine markets from a “big-picture” point of view.

With that as our backdrop, let’s dive right in and discuss three of the most important charts and/or themes from this month’s call.

1. Stocks Hold the Line

Markets have experienced a high degree of turmoil in the last year and a half. As a result, sellers have remained in full control, and many indexes and sectors find themselves below overhead supply.

However, when we zoom out and focus on the long-term trend, we see that some major structural support levels are still intact.

As shown in the chart below, the Value Line Geometric Index is currently holding above a polarity zone that coincides with former highs from two decades ago, making it a critical level of interest. 

This index represents the median stock performance and is an excellent way to view how the overall market is doing.

If the VLG can find real support here, the world is probably not coming to an end, and markets are not falling apart. 

On the flip side, if the median stock can't hold these levels, the structural trend for equities will be broken. And we should expect further selling pressure for stocks and risk assets.

2. Dollar Keeps Stocks in Check

Believe it or not, stocks have a lot going for them.

The seasonal, cyclical, and sentiment backdrops all point to opportunity. And stocks staged an impressive rally this summer, triggering breadth and momentum thrusts for the first time in over a year.

However, the one thing that continues to hold any meaningful advance in check is the US dollar. The triple-pane chart below highlights the US Dollar Index $DXY, our G-10 Currency Index, and the US dollar advance-decline line:

All three lines are trending from the lower left to the upper right and printing fresh highs. Our broader G-10 Currency Index and the a-d line confirm the new highs from the DXY. 

It’s all working for King Dollar right now.

As long as this is the case, stocks are going to have a hard time making much progress into the end of the year.

3. More Basing

Regardless of where we look, the overarching theme right now is “more basing.” The strongest stocks and indexes are not holding their breakouts, indicating more time is needed to absorb overhead supply.

And the weakest stocks and industry groups are still in the bottoming process, full of false starts and sloppy price action. 

This kind of behavior is commonplace during sideways or trendless markets, and we think we should be prepared for more of it as we approach the fourth quarter.

The Dow Jones Composite Index is an excellent illustration of how some of the largest stocks in the US are performing.

It gives us a nice mix of both offensive and defensive names, as it includes all components of the transportation, utilities, and industrial indexes. 

It's also an excellent illustration of the kind of price action taking place these days. It’s a mess out there. 

After completing a top earlier in the year, price reclaimed the lower bounds and repaired the damage during the summer rally.

However, during the corrective action of the past few weeks, sellers have regained control and knocked prices back beneath the 2021 lows. 

We think these kinds of failed moves and shakeouts will continue to be the norm over the coming weeks and months. More basing is needed for now.

Those are some of the main takeaways from this month’s strategy session.

Thanks for reading, and please let us know if you have any questions!

Allstarcharts Team

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