“We hang the petty thieves and appoint the great ones to office.” ~ Aesop
In this week’s Dirty Dozen [CHART PACK], we look at monthly charts, increasing odds of a near-term correction, a record-high liquidity backdrop, what that means for oil, and more…
1. With the close of October, we have new monthly candles. Here, we have the monthly ES. October put in a shooting star reversal candle. This comes in the third leg of a bull move, where we typically see a two-wave corrective period follow suit.
2. While we remain bullish on the larger trend, we do believe that the odds currently favor a correction over the coming weeks. We’ve noted the recent Trend Fragility sell signal and the high call/put ratio, and this chart from BofA which shows that Long Only funds have their lowest cash holdings in a decade.
3. So we think it’s a good time to be careful, though we’ll ultimately defer to the tape and let price tell us how to proceed. One pattern we’re continuing to track is the compression in small caps. Our friend Peter Brandt recently shared this (link here).
“An argument might be made that small cap stocks could do well in 2025 no matter which candidate — Trump or Harris — is elected President of the U.S.
“The weekly chart of the Russell 2000 futures contract is set to reflect this possibility.
“The chart displays a 15-week right angle ascending triangle pattern. This pattern has a high probability of success (60% of ascending triangle breakouts reach their targets with a minimum of serious retesting.”
4. Some further evidence from SentimenTrader that it’s a good time to be cautious.
“Each trading session over the last week saw more S&P 500 stocks fall than rise. Dean showed that similar breadth conditions near a high tended to precede a multi-week consolidation.”
5. Historically, this has led to poor short-term returns. ST writes: “Whenever declining issues for the S&P 500 exceeded advancing issues for five straight sessions, with the index hovering less than 1.5% below a 5-year high, the world’s most benchmarked index tended to undergo a multi-week consolidation. At some point over this time frame, the index displayed a loss in 15 out of 19 instances.”
6. And…
7. An increasingly popular narrative on Fintwit is that the bond market is telling the Fed that they’re offsides and need to move back to a more restrictive policy, which is why the 10yr yield currently stands as a historical anomaly to prior cutting cycles (chart from @biancoresearch).
8. One development that could support this thesis is if oil reverses its downtrend. BBG’s Simon White says that the liquidity backdrop is supportive of just that, writing, “Policy has been eased in an economy showing scant definitive signs of accelerated slowing. Liquidity conditions, which were already robust, have been turbocharged, leading to a surge in excess liquidity to near all-time highs. The impact on the market and the economy will be manifold, but one of the most outsized effects may well be seen in oil prices.”
9. Our HUD multi-chart view shows that crude is oversold across all three timeframes. Speculators are very short. Sentiment is in the dumps, and its relative valuation is at the 0th percentile.
10. Oil’s monthly chart is in a major compression regime, and compression regimes tend to precede expansionary regimes (large trends). We think the odds favor a breakout to the upside, but ultimately, the direction of oil will be driven by China and the size and implementation of their fiscal package, which is set to be announced this week.
11. One of the big reasons oil has been in trouble is that the Chinese consumer has been experiencing a depression.
12. Many of the energy charts are trash right now, and we’d need to see signs of a significant reversal before we become interested again. But despite the challenging backdrop, a number of names have seen solid returns over the past quarter. This list is a good place to start a search.
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