A Tricky Autumn for Investors

A Rough September, but Cycles Point to Upside in October

The Summer of 2023 felt like the good old days of 2020 with high-beta tech stocks flying high. Artificial Intelligence was the theme du jour that powered the stock market forward, while market strategists who were bearish due to macro concerns were left in the dust. Now, it’s all about macro fears once again! One can’t help but feel like the stock market has become a trap for both bulls and bears, while market makers feast on both. Especially in this type of tricky market, cycles provide a huge edge that could keep investors on the right side of the trend and prepare for reversals.

This is what actually happened:

Notice that:

• The actual historic price action of the SPY chart (2^nd chart) broadly matched the shape of the Cycles Composite (blue forecast in the cycle chart - 1^st chart)

• The June 26th bottom and reversal higher was accurate to the day

• The July 14th expected reversal came later on around July 31st, but if you were using the 20 SMA or 21 EMA, you would have remained long

• The August 7th expected low occurred 10 days later August 17th. Just as the August 26th expected high occurred on September 1st, five days later

• The September 6th expected bottom came a day later on September 7th

• The September 15th expected top occurred a day earlier on September 14th, with the expected sharp decline right on schedule!

The points above showcase the importance of cycles in planning entry and exit periods for a trade. Fighting against cycles is as good as fighting against the trend – in both cases, the odds are stacked against you.

Situational Awareness:

The S&P 500 is down about 7% from the July high. Based on the RSI and Stochastic indicator, the SPY is now oversold and likely due for a bounce. The long-shadowed candlestick on 27^th Sept also suggests that despite an early day drop, buyers stepped in towards the end of the day.

The chart below shows that when the percentage of S&P 500 stocks above their 20-day moving average falls around the 13% mark, the stock market rebounds shortly after. This even worked throughout the 2022 bear market, let alone if we’re in a full-fledged bull market right now. The real question is if the market will move into a new uptrend or stage a short-lived rally, before another leg down.

Sentiment shows that the recent bearishness could be the fuel for a strong rally. The Fear & Greed Model is in the excessive fear area reaching a historically low level of 13. In the past 7 years, every time this model reached current levels for the first time in 52-weeks, it has led to positive SPY returns across all time frames up to a year. The 1-week, 2-week, 2-months and 3-months have all had a 100% hit rate (same as win rate) during this time period.

The Smart Money/Dumb Money Confidence model shows some smart money buying, however it is still tentative, as retail continues to sell.

It’s important to note that small traders i.e., retail, continues to buy very high levels of puts in anticipation of further downside. Extreme sentiment often marks turning points in the market, and current levels are nothing short of extreme, based on this indicator.

Cycles:

• The Composite Cycle (blue line – our secret sauce!) shows a bottom on September 28th, followed by a strong rally

• The Energy Cycle (pink line), however, shows some up and down chop before the market is ready to move into a new uptrend around October 24^th

• The Seasonal Cycle (green line, 2^nd panel) shows the beginning of a bottoming process before a move higher around October 10^th

• The Decennial Cycle (gray, 3^rd panel), similar to the Composite Cycle, forecasts a bottom on September 28^th

So what’s the game plan?

Strategy #1: An investor with a long term time horizon could dollar cost average and increase exposure to equities on 9/28, 10/10, and 10/24.

Strategy #2: Wait to see if significant buying comes in during the last few days of September. If there is a change of complexion, increase equity exposure, but set profit-taking stop-loss orders around 10/6 and 10/15.

Strategy #3: Trade the Energy cycle uptrends on 9/28 and 10/10 with tight stops, but expect the real move to begin around 10/24 because this strategy has confluence with the Cycle Bracket chart below:

Good luck making money in the opportunities to come.