October Strategy Session: 3 Key Takeaways

Steve Strazza
October 6, 2022

From the desk of Steve Strazza @Sstrazza and Alfonso Depablos @AlfCharts

We held our October Monthly Strategy Session Monday night. Premium Members can access and rewatch it here.

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. All Eyes on the Summer Lows

After several weeks of intense selling pressure, the summer lows are coming into play for many indices and sectors around the world.

When it comes to the US, the smaller-cap stocks are holding above their June lows.

The chart below is an excellent depiction of the current state of markets.

The fact that demand is showing up here is an encouraging signal that suggests the bulls are still alive. However, we need to see some upside follow through as confirmation that a durable low has been made.

On the flip side, if we're below the June lows, we must anticipate heightened volatility and a fresh leg lower for stocks and risk assets.

2. A Turnaround in Internals

The S&P 500 is running into a logical level of support as internals are flashing signs of improvement. The lower pane in the chart below shows fewer individual stocks accompanying the index at its lows from last week.

With buyers entering the market alongside this bullish breadth divergence, the odds are in favor of equities experiencing some mean reversion.

While we are due for a pause in selling in the short term, bulls still have a lot of work to do before we can have conviction that the bottom is in. 

The next piece of information we’re looking for is a bullish thrust in 63-day highs as confirmation of the shorter-term thrusts that have taken place since this summer.

3. Energy Hasn’t Broke Out Yet

Although energy has experienced a strong rally from its covid lows, it's still below overhead supply. This is particularly true at the large-cap index level.

Below is the large-cap energy sector ETF $XLE being rejected by a shelf of former highs.

It's no coincidence that these stocks stopped going up at the same level they did in 2007 and 2014. There’s plenty of  market memory and overhead supply here.

While we think it could take time, it won't be any real surprise to see them eventually resolve higher from these levels as they have had plenty of time to absorb all the supply. We continue to believe that the final resolution will be higher - in the direction of the underlying trend.

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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