What a week it has been for the bulls. Last week, we closed our blog stating the following, "If markets are able to push past 4500, then there is a good chance that it will challenge the recent all-time high this week". Well, this week the bulls took control and proved us right. Both the S&P 500 and DJIA hit that mark to close out the week. With Q3 earnings season starting off, more than 75% that have reported are topping revenue forecast.
As mentioned in our last blog, there were several news outlets calling for a market top and major correction that would doom the market. In fact, many have been calling on this since the beginning of this year. Those that headed the gloom warnings and tried to hedge or short the market have been clearly stomped by this bull market.
Big Picture
All major indexes were coming into the week with one of the best performances since the summer. September was in the rearview mirror and on Monday, the market showed it with mega-cap stocks leading the way. Tuesday was a game-changer with the S&P 500 gapping up higher and closing out above 4500. And on Thursday, the S&P 500 hit an all-time high to close ou the week. Not to be outdone, DJIA also pushed higher well to hit all-time highs. So much for the impending market correction. The S&P 500 closed the week off with not just hitting a new high but posting 7 straight days of positive gains.
Market Breadth
Market breadth turned positive last week with a bullish signal being triggered for the primary trend. Though market breadth is improving it is still not where it was from earlier this year. The 5 to 10-day ratio is showing a pause in the current bullish trend. If the ratio cannot turn upwards, there could be indication that the current rally is stalling.
Market Sentiment
Investor psychology is extremely bullish as of this week's reading. BullGap's market sentiment reading hit an all-time high of 80.50 for the year. The high level of market complacency can also be seen in the Volatility Index (VIX) where it has hit an all-time low for the year. It is interesting that only a month ago, investor sentiment was right in the fear level.
Economic Outlook
According to the NAHB housing market data, the housing index had an uptick in October with the single-family sales index hitting over 80. Several of the key housing indexes such as buyer traffic and future sales rose during October. All was not positive as the New Private Housing units failed to meet expectations. It declined in September to 1.5 million.
The industrial production index just started a strong downtrend for the month but other data such as new orders are still well above pre-pandemic levels.
Market Outlook
The financial markets broke out this week but the move to hit new highs has left many of the indices in overbought conditions. Other than DJIA, the other indices closed out Friday on a flatline note. Let's review the year-to-date chart for the major ETF indexes.
SPY
SPY has been in a rally for most of the year. It broke the trend last month with an orderly sell-off with high volume. The rally that has occurred in the last couple of weeks has been on declining volume. If you look at the chart below, the orange dash outlines the decline in volume as the market rally in SPY.
QQQ
Large caps for the earlier part of the year had some consolidation before breaking out in the summer. Like SPY, the recent rally has been on declining volume.
IWM
Small-caps have been in a consolidation pattern for most of the year. It also has rallied but on declining volume.
Concluding
After going through the dip in September, October is looking to be a strong month for the market. That said, this rally to new highs is showing some warnings that a reversal may be in play for the coming week or two. Market technical readings are now back in overbought territory and BullGap's market sentiment is suggesting market participants are becoming complacent.