October Mid-Month Conference Call: 5 Key Takeaways

1. Dow Eyes Support

There is no level more important than the June lows for risk assets right now. Another big potential support zone for many stocks and indexes is the pre-covid highs.

The chart of the Dow Jones Industrial Average $DJI illustrates just how pivotal both of these levels are right now.

As you can see, the Q2 lows and early 2020 highs coincide almost perfectly around 29,600-29,700. Whether or not the index can remain above this polarity zone in the coming days and weeks will give us valuable insight about the future direction for the overall equity market. 

2. Improving Internals

With significant support levels coming into play for US indexes, we’re seeing incremental improvements in market breadth and internals.

Here is our sector-level breadth indicator (dark blue line) putting in a slight positive divergence, making a higher low even as the S&P 500 makes lower lows (light blue line).

This tells us that more uptrends are forming beneath the surface in various sectors. This kind of breadth improvement is constructive and will need to continue if the major averages and broader market are going to put in a durable low. If that is the direction things are headed, we should see other breadth improvements, such as an expansion in new short-term highs in the near future.

3. Rates Rip

The US 10-year is up eleven weeks in a row, posting a stretch of upside momentum not seen since the late 70s. And if today’s action holds into tomorrow’s close, it will mark twelve weeks in the green for the 10-year yield.

As the US benchmark rate takes out the key psychological level of 4%, we think this is a logical place and time to see the explosive rise in rates take a breather. While that may be the case, we’re not seeing any signs of it yet. For now, interest rates continue to rip across the curve and around the world, putting pressure on long-duration assets.

4. Small Caps Take the Lead

While all of the major large cap averages have violated their summer lows, the small and mid-cap indexes have remained above these key levels. 

This relative strength from stocks as we move down the market cap scale is actually nothing new. When we look at a ratio of the Small Cap Russell 2000 (IWM) versus the Large Cap Russell 1000 (IWB), we see that small caps have been basing on relative terms for the better part of this year.

After bottoming against large caps back in May, small caps just broke to their highest level since December 2021 on a relative basis. 

If these new highs hold and this rounding bottom pattern turns out to be a valid reversal, we should see an acceleration in outperformance from small cap stocks in the future.

5. Industrial Stocks Produce Leadership

After trading in a sideways range on a relative basis since last summer, Industrials are making new 52-week highs versus the overall market. The chart below shows the XLI/SPY ratio completing a bearish-to-bullish reversal pattern, suggesting more outperformance from Industrials is coming our way.

With a successful retest of the breakout level, this rounding bottom formation looks like the real deal. As long as the ratio holds above that shelf of year-to-date highs, we want to look to Industrials for long opportunities.

As always, Premium Members can rewatch the Conference Call and view the slides here!

We hope you enjoyed our recap of this month’s call. Thanks for reading, and please reach out to us with any questions!

Allstarcharts Team