October 2, 2019

We have been saying a 3-5% pullback is likely, and it is now taking place. We called for a modest pullback because one of our indicators hit a short-term overbought signal on 9-18 which signaled a pullback was near. A lot of short-term trades have developed similar indicators, and this is why, from time to time, you will see the market sell-off on a shorter-term basis.

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We do feel that short-term lows are setting in. We are bullish going into Q4, and the HCM BuyLine® remains positive. This should carry forward into 2020 which remains intact as most risk assets will pull back after strong rebounds from early September. Heading into September’s Federal Open Market Committee (FOMC) meeting, we highlighted the likelihood that equities would pause and pull back from short-term overbought levels. Now, after a 1-2-week pullback, many stocks are showing early evidence of bottoming near first support at rising 50-DMA’s as daily momentum indicators work off much of their overbought condition.

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Along with the HCM BuyLine® being positive, our bullish outlook through Q4 into 2020 is the improving cycle background which views the 12-18-month trading range as part of a normal 4-year cycle pullback similar to what developed in 2016 and 2011. Despite worrisome headlines and backward-looking economic data, we expect markets to push higher through Q4 as both weekly and monthly indicators build to the upside.

  • The Chicago Business Barometer fell 3.3 points in September to 47.1, contrary to the consensus of a 0.1-point gain to 50.5.
  • It has been in contraction territory in three of the past four months, as regional factory activity weakness took hold.
  • Production shrank at the fastest rate since May 2009.
  • New orders and order backlogs renewed their declines, indicating slowing demand.
  • Inventories also slipped further into contraction.
  • Employment continued to fall, albeit at a more moderate pace.
  • Supplier deliveries slowed.
  • There was a modest decline in price pressures, although the report noted "anecdotal evidence of tariffs affecting prices and business activity."

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