/ October 28 / Weekly Preview
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Tuesday:
CB Consumer Confidence
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Wednesday:
Fed Interest Rate Decision
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Thursday:
N/A
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Friday:
N/A
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Tuesday:Visa Inc.
UnitedHealth Group Incorporated
NextEra Energy, Inc.
Booking Holdings Inc.
Southern Copper Corporation
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Wednesday:
Microsoft Corporation
Alphabet Inc.
Meta Platforms, Inc.
Caterpillar, Inc.
ServiceNow, Inc.
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Thursday:
Apple Inc.
Amazon.com, Inc.
Eli Lilly and Company
Mastercard Incorporated
Merck & Company, Inc.
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Friday:
Exxon Mobil Corporation
AbbVie Inc.
Chevron Corporation
Linde plc
Colgate-Palmolive Company
Stocks Back to All-Time-Highs
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U.S. markets surged on Friday and Monday, setting a fresh round of record closes for the S&P 500 and the Nasdaq Composite. Investors were mainly enthusiastic about a cooler than expected inflation print (CPI at 3.0% vs 3.1% expected). Further Fed Rate Cuts are now expected, and there is hope that the era of Quantitative Tightening will come to a close.
Our “Buy -the-dip” signal for SPY did its job and triggered 3 times in October, more than in any month so far this year. Retail capital flowed into familiar names like NVDA, AMD, META, as the ATH technical break reinforced risk appetite.
Despite such close proximity to records, market sentiment had been downright depressed, with values reaching “Extreme Fear” readings all of a sudden (similar to what was recorded during the March-April correction).
The takeaway from this setup is that there is plenty of demand for re-risking into year-end, as Q3 earnings season wraps up and companies unleash their share buyback programs. Yet with large portions of the U.S. federal government still in a partial shutdown, delayed key economic releases might translate into surprises when the numbers finally get reported.
There are also, concerns over trade and tariffs as the ongoing "battle of wills" between President Trump and President Xi continues. The administration has proposed more aggressive trade measures against China, such as possible new export restrictions and higher tariffs, which are disrupting global supply-chain transparency in the semiconductor and AI hardware industries.
Other signals are not so bullish on the economy as the stock market. Layoff news abound, CPI came in weaker than expected, and a rise in bankruptcies of subprime lenders is becoming more concerning. Total credit card spending growth only rose a modest 0.3% annually (see the chart below — spending declined in almost every category):
Investors are right to ask how much underlying momentum exists in the economy relative to the stock market. At the moment, investors are betting heavily on moderate (but positive) growth, easing inflation, predictable government policy, and strong earnings. That’s the only rationale to keep buying dips to this extent.
Yet the risk-reward proposition (as derived from the options market) has started to heavily skew to the downside. In the Market Study below, the histogram is composed from Long Term Upside for the top 10 stocks in the market (where options walls should be the most well researched) and medium-term risk has increased significantly.
At the moment, the latest balance is +19% combined upside versus -35% combined downside (1-6 months) and -17% downside (up to 1 month). During the April correction, we had +50% upside and -19% medium term risk, by comparison.
As such, we have to conclude that the margin of error for investors is shrinking. Such is the conclusion of today’s rebalancing event for the Enterprise strategy as well.
For the first time since mid-May, Enterprise has reduced allocation to the equity market to around 40% of portfolio NAV, near the minimum allowed while still in a bull-market. This serves as an early warning for us that the time is near to start harvesting profits and tighten stop loss levels as the market becomes more and more overvalued.
However, the technical background remains strong, with a breakout now just confirming the bullish narrative. Typically, breakouts create conditions where short sellers become squeezed and momentum chasers bid the move higher. Meme stocks, non profitable shares and large buyback stocks were the primary beneficiaries.
Resistance stands at $701 (R1), while support is at $662 (M-Trend level).
There is still a wide level of divergence between longer term bullish options flows and the trend of the market.
The same divergence story repeats across market breadth, counting the number of stocks trading above key moving averages.
While none of this means we are headed for a crash, or anything of this sort, warnings signals abound. These are levels where traders and longer term investors alike need to be on their guard, as the foundation for this rally appears ever so fragile.
While no sell signals have actually triggered so far, the next phase of the market depends on whether breadth and earnings can confirm what price action is now foreshadowing.
Some of the market’s heavyweights are reporting this week and will provide plenty of headline fodder (MSFT, AAPL, META, GOOG, AMZN). These companies account for more than 20% of the S&P 500’s market capitalization. Their earnings will either reinforce the story of strong profits fueled by AI-driven growth or highlight emerging worries about weakening consumer demand and shrinking profit margins.
As it stands, the market’s seeing more downside than upside, as it was reflected in the Market Study at the beginning of this article.
Our Trading Strategy
This week is critical to the direction of the market. “Make or break” is an understatement. With stretched valuations and positioning, any negative surprise on the earnings front can trigger a sharp reversal.
Conversely, strong data and earnings beats from the market’s leaders would reinforce the bullish breakout and push indexes to new highs.
The government shutdown and delayed economic data releases are the wildcard. As shown in the chart below, some clients are running low on cash — professional managers are now “all in”; which of course begs the question: if everyone’s “all in” who’s left to buy? Additionally, other measures of cash are flashing warning signals, like the levels of retail margin debt, now at a record $1.13 Trillion.
With Enterprise cutting back on equity market exposure at current levels, the warning signal is loud and clear. The market is becoming fragile and FOMO has almost entirely replaced fundamentals for retail traders.
The smart thing to do here is cut speculative bets, raise stop loss levels for all positions and diversify into safer, less volatile assets while also maintaining exposure to the market.
We’ll keep you in the loop via the next trade alerts for Portfolio Rebalancing.
Signal Sigma Research & PRO members will be notified by Trade Alert of any live portfolio changes (if subscribed). If you’re not on this plan yet, you can get a free trial when you join our Society Forum. If you need any help with your trading strategy (or would like to implement one on your account), feel free to reach out!
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