Day Hagan Tech Talk: Weight of the Evidence
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Summary
Our Smart Sector models, which update today, recommended overweighting China at the beginning of the month. Despite election worries, when we combine our Smart Sector strategies with our weight-of-the-evidence approach, the Bulls remain in control.
Condition vs. Signal
This week’s Tech Talk is early, as last week’s was canceled on account of Hurricane Helene.
We have consistently maintained that seasonal studies, statements about overbought and oversold, and to a smaller degree sentiment should be viewed as second-tier indicators. Since they depict a condition and not an actual signal (buy or sell), they should provide context instead of dictating strategy and allocation decisions. That is where we find ourselves now. While September is typically the weakest month of the year for equities and I did discuss volatility in both directions, I was wrong in spending so much time discussing the weak seasonal backdrop. A rapid change in Federal Reserve policy helped Wall Street overcome pre-election jitters and geopolitical concerns, at least for now. Regardless, while time remains for equities to experience either a price or time correction, the weight of the evidence still supports equities going into Q4 and year-end.
Weight of the Evidence
Catastrophic Stop model (benchmarked against the S&P 500 [SPX]): While concerns exist, the model has correctly maintained a risk-on (fully invested) stance for all of 2024.
Our goal is to stay on the right side of the prevailing trend and deploy risk management when conditions deteriorate. As has been the case for all of 2024, the Catastrophic Stop model is positive, and we are aligned with the message. If our models shift to bearish levels, we will raise cash.
Big Mo Multi-Cap Tape Composite (measures the percentage of sub-industries in uptrends, from NDR): Neutral, but higher than six weeks ago—historically mildly bullish for equities.
NYSE New Highs minus New Lows (weekly): The number of weekly New Highs is below previous peaks. But the net number of weekly New Highs minus New Lows has been tracking in the right direction since early June, exhibiting a pattern of higher troughs—mildly bullish.
Advance-Decline Lines (A/D Lines): Except for the Small Cap A/D line, which has broken out topside and pulled back, most domestic A/D Lines and a Global A/D Line are in sync (higher) with their respective cash index. No negative divergences exist—supportive for equities.
Higher troughs and higher peaks (from 1/2/24 to present): Uptrends tend to exhibit a pattern of two steps up, one step back, etc. Don’t be surprised by periods of consolidation or pullbacks.
Following the recent longer-term (non-trading) perspective for the S&P 500, let’s switch gears and highlight the shorter-term chart configuration of the Dow Jones Industrial Average (DJIA) because it is followed by the majority of investors and most media outlets.
Figure 1: DJIA with Rising 200-day MA (support, blue dashed line) | Favorable price trend with resistance highlighted in red; support highlighted by green and blue lines.
Choppy for Longer?
I’m sure Wall Street remembers when Fed Chairman Powell said, “higher for longer” when describing the Fed’s stance on interest rates. Taking liberties, we can acknowledge that two different Technology proxies haven’t made any progress on an absolute or relative basis in months (dashed blue vertical lines). Should we say, “choppy for longer?”
Figure 2: NASDAQ 100 and XLK vs S&P 500. | Based on our Smart Sector Strategy sector allocation models, we are positioned accordingly—choppy for longer.
Speaking of choppy, I think the last 3+ year chart configuration of the Dow Jones Transportation Average may fit the dictionary definition.
Figure 3: Dow Jones Transportation Average. | Considering the potential port strike, is anyone talking about this? Not that I see, which is encouraging (bullish) from a contrarian perspective.
Leave Us Hope (still a condition, not a signal)
“…we’d note that October has historically been the month where the most 10%+ rallies have begun. Of the 61 rallies of 10%+ since WW2, nearly a third (19) have started during the month of October.” (Bespoke)
Please let me know if you would like to schedule a call to discuss the process and discipline underpinning our Smart Sector with Catastrophic Stop, Smart Sector International, and/or Smart Sector Fixed Income strategies. Disclosures and Fact Sheets can be found here: https://dhfunds.com/literature.
Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies. Please let us know how we can further support you.
Art Huprich, CMT®
Chief Market Technician
Day Hagan Asset Management
—Written 9.27-30.2024. Chart source: Stockcharts.com unless otherwise noted.
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