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The Markets
Stocks ended higher on Friday following an upbeat read of gross domestic product for the second quarter. The S&P 500 Index gained nearly nine-tenths of one percent, closing above its 50-day moving average. Market internals on the day were strong with cyclical assets outperforming defensive sectors, suggesting a risk-on session. Looking at the hourly chart of the S&P 500 Index, the large-cap benchmark closed around declining trendline resistance, suggesting that the short-term trend remains firmly negative despite the end of week surge in stock prices. Momentum indicators remain in bearish territory as they attempt to rebound from oversold territory. Equity markets are within a month of the average entry date to the positive six month seasonal cycle that spans the last two months of this year as well as the first four months of next year.Therefore, investors should be looking for triggers to signal the start of the seasonal trend ahead, taking advantage of weakness in favoured sectors between now and late November. Risks to the market over the next couple of months include the strength in the US Dollar, US Mid-term Elections, and actions by central bank leaders around the globe, each of which will keep investors on their toes and likely keep volatility alive. The Volatility S&P 500 continues to point higher, now up around 45% from the July low; the VIX reaches an average seasonal peak during the month of October.
Taking a broader look at the S&P 500 Index, a long-term rising wedge continues to evolve with a test of the lower limit of the pattern during Friday’s session. The pattern is currently defining support around 1965, a break of which could lead to significant downside potential. Price continues to trend towards the peak of the pattern, suggesting a break may be imminent. The pattern stretches back to 2011, just as the Quantitative Easing 2 (QE 2) program came to an end, leading to a significant correction in equity prices until the Fed announced Operation Twist; perhaps it is no coincidence that the pattern reaches a peak just as QE 3 concludes. Ideally, a downside break over the next few weeks would provide appealing buying opportunities for the six month seasonal trend ahead, allowing for the potential of larger than average seasonal gains from a depreciated state.
Seasonal charts of companies reporting earnings today:
Sentiment on Friday, as gauged by the put-call ratio, remained bearish at 1.13.
S&P 500 Index
TSE Composite
Horizons Seasonal Rotation ETF (TSX:HAC)
Performance*
2014 Year-to-Date Since Inception (Nov 19, 2009) HAC.TO0.56%43.8%
* performance calculated on Closing NAV/Unit as provided by custodian
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