Mid-week market update: Further to my last post (see
A buy signal setup), the 14-day RSI of the S&P 500 Intermediate Term Breadth Momentum Oscillator (ITBM) flashed a buy signal when it recycled from oversold to neutral. By the book, this is a legitimate buy signal.
Under the current circumstances, I have some doubts and I am putting a * next to the buy signal. Here’s why.
Earnings disappointment risk
I had highlighted the risk of earnings disappointment during Q3 reporting season, as forward 12-month EPS estimate revisions are falling, indicating negative fundamental momentum.
Bloomberg reported that Citigroup’s earnings revisions index was highly negative in September.
A silver lining
Here is the silver lining in the dark cloud. John Butters at
FactSet observed that the sector exhibiting the best earnings guidance is technology, which is surprising as the stocks in the sector had been struggling recently.
In fact, technology earnings guidance hasn’t been this positive since late 2020 and early 2021.
An analysis of the technical conditions of the sector reveals slow improvement in relative breadth (bottom two panels).
The relative performance of the NASDAQ 100 may be turning up after its normalized relative performance (black line) touched an oversold level. The 10 week MA of % bullish on P&F has also rebounded, indicating strength.
The technology sector was rocked yesterday by ASML’s profit warning yesterday. From a technical perspective, the Semiconductor Index is testing its uptrend, and it’s trading above a relative support zone (bottom panel). I regard this development as constructive.
Bullish sentiment
Sentiment is getting a little giddy. The latest BoA Global Fund Manager Survey saw a risk-on stampede into equities, though most of the fund flows went into emerging markets in response to China’s policy pivot. Allocation into the U.S. only rose marginally.
The
Fear & Greed Index is well into the greed zone, though this index can stay elevated for some time and excessive greed isn’t an actionable sell signal.
However, the equity put/call ratio neared the bottom of its 1-standard deviation band, and past breaches of this line by either the overall put/call ratio (top panel) or equity put/call ratio (bottom panel) saw the stock market rally stall. This is an indicator to keep an eye on.
In summary, ITBM flashed a buy signal based on price momentum, but investors face risks in the form of earnings disappointment, giddy sentiment, and electoral uncertainty. Subscribers received an alert on Tuesday that my inner trader had initiated a long position in the market, but conviction in this trade is not as strong as it usually is because of the risks. The usual disclaimers apply to my trading positions,
I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.
