Risk-On Rotation

Premium Section: Pharmaceutical (XPH), Cybersecurity (HACK) & Airlines (JETS) and Banks (KRE)

The stock market reached new highs this past week, as higher-than-expected CPI was brushed off and lower-than-expected PPI was celebrated. A new breadth thrust may be developing as Small Caps rally, though sentiment could be turning overly bullish. This week, we’ll analyze market conditions and explore some key rotations happening beneath the surface. In the Premium Section we’ll look at setups in Pharmaceuticals (XPH), Cybersecurity (HACK), Airlines (JETS) and Banks (KRE).

Market Conditions: A New Breadth Thrust

The S&P 500 (SPY) broke out to all-time highs last week as price continues to trend above the 9 EMA (pink) and 21 EMA (blue). As long as SPY stays above the prior high of $574 we can expect it to reach the R1 Pivot Point at $585 or the R2 Pivot Point at $598. Furthermore, as long as SPY stays above the 21 EMA currently at $569, it remains in an uptrend.

Breadth measures are indicating a new breadth thrust in the making. There’s a spike in new highs, and the McClellan Oscillator is curling up, about to break above the 0 mark. The Zweig Breadth Thrust shows that breadth is gaining momentum. Additionally, the percentage of S&P 500 stocks above the 20-day SMA (S5TW) is rising and isn't close to overbought levels. Even the VXV/VIX ratio is near 1, which is typically an excellent buy point. Looking below, the NYSE Advance/Decline Line is bouncing off the 20-day SMA, and with the RSI not yet overbought, a surge in breadth seems likely. Overall, the breadth picture points to an upcoming strong rally.

The main concern is that the market may be becoming too bullish. The AAII Bull Ratio is at a bullish extreme, a level where pullbacks or consolidations often occur. Additionally, the Equity Put/Call ratio is heavily skewed toward call options.

Next week does not have a lot of economic data. The most important data drop is Core Retail Sales on Thursday.

However, it is earnings season. JPMorgan kicked off earnings last week, and so far, the results have been quite positive. Strong earnings could be the factor that keeps the market moving higher in the 4th quarter. Next week, Goldman Sachs, Bank of America, and Citibank report on Tuesday. Morgan Stanley and ASML report on Wednesday. Netflix, Blackstone, and Taiwan Semiconductor report on Thursday, while American Express and Procter & Gamble report on Friday.

Risk-On Rotations

Last week money rotated into Technology, Industrials, Healthcare and Financials which are risk-on sectors. Money rotated out of Utilities and other defensive sectors. This is a very positive sign for the rally.

Taking a closer look at the industry level we can see that there is a broad number of industries that beat the SPY’s 1.15% appreciation for the week. We tried to look for specialty industry ETFs to cover and found Pharmaceuticals (XPH), Cybersecurity (HACK), Airlines (JETS) and Banks (KRE), which we will cover in the Premium Section. We also note that Transports (IYT), Industrials (XLI), Financials (XLF) and Semiconductors (SMH) look attractive and their cycle forecasts are available here.

Note: We’ve now released our Q4 2024 Cycle Forecasts for sale to everybody. You can read more about these Forecasts here. Access all different asset Forecasts at www.cyclesedge.com. Our Founding Members have already been emailed the entire set. If you’re a Founding Member and haven’t received the Q4 2024 Cycle Forecasts, please reach out to us via Substack or Discord (preferable).

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