S&P 500: October
Last quarter of 2024
The Final Quarter in 2024
The S&P 500 edged up 0.22% this past week, reaching another all-time weekly high, while the Nasdaq posted a modest 0.13% gain, finishing relatively flat. Meanwhile, the small-cap Russell 2000 slipped 0.5%, and the ARKK, representing a more modern small-cap category, fell 2.78%. Despite these mixed results, the market continues to favor bullish participants.
As always, this week's letter, being the first Sunday of the month, is free for all readers. For ongoing insights, including updates on risk-off signals, trade ideas, and special reports when market conditions shift, consider subscribing. Monthly and annual plans are available, and you can subscribe today at 10% off the monthly rate.
Risk Off Criteria - 1/3
Three components define the market environment as either risk-on or risk-off.
The Short Term Trend— price relative to the 20-day exponential moving average
Breadth— the number of stocks making new highs vs new lows across NYSE & Nasdaq markets, middle panel “Net New Highs”
Momentum— measured using the Percentage Price Oscillator, lower panel
Although Friday’s strong rally helped end the week on a positive note, the pullback from Tuesday to Thursday triggered the momentum criteria. However, momentum alone is not enough to signal a risk-off environment. Without negative breadth or a break of the short-term trend, the odds continue to favor the bulls as we head into next week.
Navigating The Short Term
In the short term, the focus has been on the 20-day exponential moving average as a key indicator. When prices hold above this level, the market tends to favor a risk-on environment, while a drop below it triggers one of the risk-off signals, suggesting a potential pause in the advance.
Last week, the S&P 500 experienced a minor pullback from Tuesday to Thursday, dipping right to the 20-day moving average, where it found support before rebounding on Friday.
The index has now established a two-week consolidation range, with the upper boundary at 5767, representing recent highs, and the lower boundary at 5676, aligning with both a previous breakout level and the short-term moving average.
Small Caps— Modern Day Risk On Barometers
ARK Innovation ETF
ARKK closed the week maintaining price above the medium duration moving average (50-day exponential)— in fact the low from Thursday utilized the moving average as price support. This moving average has well supported prior advances in this ETF. The primary breakout level remains 52— when price consistently close above 52 it will signal the end of a multi-year consolidation period and position the ETF for a breakout.
The strategy to capture outperformance in this category has my portfolio positioned long ARKK.
For new readers— the strategy is simple to establish an initial allocation: position long on ARKK when the ETF closes above 45, and exit if it closes below 45. This process is repeated until either a breakout occurs or a deeper correction disrupts the potential for a melt-up scenario. This strategy positioned long for its fourth attempt in mid September.
IWM - Russell 2000 ETF
The Russell 2000 ETF consolidated through last week and remains positioned for a breakout attempt with 225 being the breakout level.
Bonds
The 20-year Treasury Bond (TLT) remains below 100. As a general rule for the current market, I am noting prices above 100 as a signal for underlying risk-off development for US equities— should this happen the risk-off segment of the market analysis will provide confirmation.
Summary Outlook
My market outlook and conditions for each outlook remain unchanged.
In the bullish scenario: position overweight long in small cap equities, namely ARKK. Signals for this scenario are the absence of “risk off criteria” in the broader market and a breakout in ARKK and IWM trading above 52 and 212, respectively. The US Small Cap trade idea category through this scenario will gain exposure.
Updates: ARKK positioning remains long
Updates: Tencent hit target, returning 64% from the initial trade idea shared in February. The position has been trimmed to full exposure (previously overweight). Alibaba and Coupang remain with overweight allocation.
Heading into the week of Oct 7 the bullish scenario is on.
In the bearish scenario: position short the S&P 500, and long bonds. Signals for this scenario is when all three risk-off criteria are simultaneously triggered— and long bonds becomes favored when TLT (iShares 20+ Year Treasury Bond ETF) trades above 100.
Trade Ideas
All three category trade ideas: US Small Cap Equities, Outside US Equities, and The Gold Trade were updated in last week’s letter. The updates remain relevant into the coming week—details here.
Disclaimer: The information in this article is for informational purposes only and should not be considered financial advice or a recommendation for any investment. I am not a financial advisor, and the content is not intended to serve as financial advice. It is solely intended to journal thought, ignite more thought and discussion.