Where Should You Look To Buy In November?

The stock market had something for both the bulls and bears last week. The S&P 500 closed higher three days and lower for two with the largest change being the 1.6% decline on Monday. That was the largest daily decline since September 23, as big tech stocks like Alphabet (Google), Microsoft MSFT , Apple AAPL , and Amazon AMZN were all under pressure. The selling was broadly-based, as all eleven S&P sectors were lower.

For the rest of the week, the S&P 500 was in a tug of war between the bulls and the bears as there were a number of intra-day swings. The S&P closed higher the rest of the week except for a slight loss on Wednesday, but ultimately still closed lower for the week.

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For the week, the Nasdaq 100 NDAQ was the weakest, down 1.4%, followed by a 1% loss in the Dow Jones Industrials. The S&P 500 finished down 0.5%, while Dow Jones Utilities were the top weekly performer, up 1%. The iShares Russell 2000 (IWM) IWM was up 0.4% but it is still negative YTD.

The Communications Services Select (XLC) XLC was up 2.2% for the week. This ETF has 23.2% in Facebook (FB) and another 23.7% in Alphabet (GOOGL). Last Tuesday, an antitrust complaint was announced against GOOGL, which reports earnings this coming Thursday, as do Amazon (AMZN), Apple (AAPL), and Facebook.

XLC had a September low of $57.06, as it briefly dropped below its 20-week exponential moving average (EMA) which is now at $58.36. The August high was $65.20, with the weekly starc+ band at $65.46. The close last week was just above the yearly R2 resistance level at $61.71.

The weekly relative performance (RS) has moved back above its weighted moving average (WMA), but is facing strong resistance (line a). The On Balance Volume (OBV) is also now positive, as it has closed above its WMA. There is also strong OBV resistance (line b).

The communications services sector was created through a reshuffling of the S&P 500 in September 2018. Several large information technology stocks such as FB, GOOGL, Netflix NFLX (NFLX), and Comcast CMCSA (CMCSA) along with the entire telecommunication service sector were included in the new sector.

The new communication services, along with industrial, energy, bank, health care and retail are generally considered to be value sectors. In past columns, I have looked at the ratio between growth and value stocks by using the iShares Russell 1000 Growth (IWF) IWF and the iShares Russell 1000 Value (IWD) IWD .

The ratio low in the iShares Russell 1000 Growth (IWF) / iShares Russell 1000 Value (IWD) rebounded sharply from the September lows. However, the failure of the ratio to exceed the August high of 1.8520 suggests a more significant head and shoulders top may be forming. A top formation in this chart would forecast that value stocks would start leading growth stocks.

The left shoulder (LS) at 1.7935 was formed in early July with a possible head (H) the week ending August 24 at 1.8520. The ratio made a rebound high in September at 1.8241 and then a week ago closed at 1.8265. Last week it declined to 1.8050 and the neckline of the possible H&S top is at 1.7800 (line a). The 20-week EMA for the IWF/IWD (value-to-growth) ratio is at 1.7540 with the September low at 1.7500. A decisive close below the neckline is needed to complete the formation of a head and shoulders top.

The weekly Moving Average Convergence-Divergence line dropped below the signal line support (point b) during the week ending September 8, and is has been declining ever since. The MACD-Histogram formed significantly lower highs (line c), and has moved lower as the ratio moved higher. This negative or bearish divergence is consistent with a top. The MACD-His turned negative seven weeks ago.

It would likely take a few weeks before the head and shoulders top could be formed, and this week’s big tech earnings could again boost growth over value. The bank stocks were sharply higher last week, with the SPDR KBW Bank ETF (KBE) KBE up 6.4% and the SPDR Regional Banking ETF (KRE) KRE up 8.1%. Both are quite extended and are likely to see a pause or a pullback over the next week or two.

So how is the overall stock market technically?

On a weekly basis, on the NYSE there were 1681 issues advancing and 1434 declining last week, as the NYSE Composite closed up 0.23%. If the NYSE moves above the recent high at 13,350, the next resistance is the weekly starc+ band, currently at 13,694. The rising 20-week EMA is at 12,668 with the weekly chart support (line a) at 12,400. The NYSE All Advance/Decline line turned upward and made a new rebound high two weeks ago. It is well above its rising WMA, which was tested at the September lows. This indicator has had a good record in past elections.

Looking at the daily perspective, the Spyder Trust (SPY) SPY spent most of last week testing the rising 20-day EMA at $342.40, with a Thursday low at $340.65. There is daily chart resistance at $353.37 (line a), with the October 12 high at $354.02. The daily S&P 500 A/D line also made a new high on October 12, and tested support (line b) last week before turning higher. This is a positive sign.

In addition to the fact that more than 1/3 of S&P 500 companies report earnings this week, there are a number of widely watched economic reports. This includes reports like the Chicago Fed National Activity Index, Durable Goods, Consumer Confidence, GDP, and Consumer Sentiment.

The positive daily A/D line analysis could turn negative if we see a day or two of heavy selling. One cannot rule out a sharp 1-3% correction before the election, but I think if it occurs it will be a buying opportunity. I would look first for support at the October lows, and then the 20-week EMAs. I will be watching the growth/value ratio closely.

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