I believe it could be.
In my Daily Market Report to EarningsBeats.com members, I pointed out a couple very positive short-term developments. First, the S&P 500 pulled back to 3229 yesterday, EXACTLY a 10% correction from its recent all-time high. Extremely bullish sentiment readings suggested that September would likely present challenges like we hadn't seen since bottoming in March. That's exactly what we've seen in September.
Another technical development that's taken place, and I believe it's quite bullish, is that the ratio of growth stocks to value stocks (IWF:IWD) pulled back to test a key trendline:
I was expecting a pullback to test one or both levels identified above with a green arrow. After setting a previous high in July, the IWF:IWD ratio fell to set an important short-term relative support level at 1.68, one that tested the prior breakout. If this ratio drops below 1.68, I'd favor a more significant decline. Thus far, however, that level is holding and the IWF:IWD ratio bounced nicely on Monday as money rotated throughout the session towards technology and the NASDAQ, in general.
Could we see one more move lower? Yes. This is historically a very bearish week for the S&P 500 - the 3rd worst calendar week of the year since 1950. But the reversal on Monday was important as growth stocks saw tremendous buying throughout the session. The NASDAQ 100 ($NDX) closed more than 200 points above its open. That reeks of accumulation to me, not distribution.
I had to chuckle when I read three separate articles yesterday pointing out that the downtrend has now begun. We've already had a 10% correction on the S&P 500 and it's been closer to 15% on the NASDAQ 100! It's a bit more helpful when this is pointed out at or near the top, not after the drop takes place. Sentiment issues warned us in late-August and early-September. Those issues are no longer a problem. While I won't rule out more consolidation, I much more favor a pre-earnings run higher, which is typical as we move into early October.
It's just my opinion, but I believe we'll see a very strong 4th quarter and this weakness should be used to accumulate and build positions, not to exit. If that IWF:IWD ratio loses 1.68 support, I'd re-evaluate. Until then, think about using these sale prices to "stock" up on your favorite companies.
Our Model Portfolio has held up extremely well since the announcement of the latest 10 equal-weighted stocks to be included. That occurred on August 19th, and our Model Portfolio has risen 4.49% over the past month, while the S&P 500 has fallen 2.78%. That's outperformance of more than 7 percentage points in one month. If this outperformance continues through November 19th, it'll mark the 7th quarter out of 8 that the Model Portfolio has beaten the S&P 500. Since its inception on November 19th, 2018, it's now higher by 137.48%, more than 115 percentage points higher than the S&P 500's 21.94% gain over the same period.
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Happy trading!
Tom
