By J.C. Parets & All Star Charts
Monday, 3rd October, 2022
1/ Silver Thrust
2/ Seasonality Becomes a Tailwind
3/ The Smaller, the Better
4/ Inflation Breaks the Ice
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1/ Silver Thrust
Silver had its second-best day of the past decade today, with the iShares Silver Trust (SLV) jumping over 9%. Silver has been trending lower all year, along with the rest of the precious metals space. However, momentum thrusts, like the one we saw today, are often early characteristics of a trend reversal.
While this is a good start for SLV, there is a shelf of overhead resistance around $20. This level acted as support several times last year, until it eventually broke in the second quarter of this year. If SLV can reclaim that $20 level, it could further solidify this potential trend reversal.
2/ Seasonality Becomes a Tailwind
With the toughest seasonal period for stocks now behind us, we are entering into what is historically a much more favorable time of the calendar year for stocks.
The average daily performance of the S&P 500 for each trading day of October since 1950 is shown in the chart below.
What stands out is that each day of October has yielded a positive average performance since 1950. This was not nearly the case in September—or more specifically, last week.
With seasonal trends now in favor of the bulls, this could be a logical time for stocks to cool off and experience some mean reversion.
3/ The Smaller, the Better
Small-cap growth stocks, represented by the iShares Russell 2000 Growth ETF (IWO), were some of the hardest-hit stocks during the current cycle. They peaked almost a full year before the major averages, back in February of 2021. However, the relative trends have shifted significantly ever since. After some base-building, small-cap growth stocks appear to be in a leadership position once again.
When we compare small-cap growth stocks relative to their mega-cap growth counterparts, the recent strength stands out. Not only did this ratio bottom in the first quarter of 2022, it has already resolved higher from a bearish-to-bullish reversal and is trading at a 10-month high. There could be plenty of bullish opportunities coming out of this sector once stocks find a floor.
4/ Inflation Breaks the Ice
The 10-year breakeven inflation rate has broken to its lowest level since March of 2021.
Seeing this large topping formation resolve lower could confirm that Federal Reserve policy decisions are having their desired effect.
As long as this remains the case, cyclical areas of the market could come under increased pressure, a category that includes commodities.
On the other hand, growth sectors and other long-duration assets such as bonds could begin to catch a bid. If inflation continues to cool, we may be entering the early stages of a trend reversal for some of the most beaten-down areas of the market.
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Originally posted 3rd October, 2022
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