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In last week's report, I identified 2,121 as a key level to watch in the benchmark S&P 500, saying a breakdown below that level would clear the way for a deeper decline as we headed into Election Day.
That is precisely what happened last week, as the major indices logged another weekly decline, led down by the Nasdaq 100 (-3%) and Russell 2000 (-2%).
Last week's weakness was broad-based, with every sector of the S&P 500 finishing lower. The poorest performers were technology (-2.7%) and energy (-2.3%).
We are at a major decision point where investors must draw some longer-term conclusions as to where we are headed as a country. As is often the case, this political and economic decision point can also be seen in asset prices.
Stocks spiked on Monday, following news that the FBI said Hillary Clinton should not face criminal charges after a review of new emails. This action clearly indicates the market would be much more comfortable with a Clinton presidency.
Fear Can Be a Good Thing
Since mid-July, I have been warning that the extremely low market volatility -- as evidenced by a reading in the Volatility S&P 500 (VIX) near 12 -- would keep a lid on the market. Following that report, the S&P 500 rose just 1% into its Aug. 15 high of 2,194. The index closed 5% off that high on Friday.
Last week, we saw a sharp increase in investor fear, as the VIX spiked to 23 -- a level that has either led or coincided with every important bottom in the S&P 500 in recent history.
So the VIX is telling us that, unless stocks are going into a bear market, the S&P 500's larger 2016 advance should resume.
Market Testing Major Support
Now that we know the market is likely to go up, the next chart highlights the key underlying support levels from the August highs down to the late-June Brexit lows.
Last week's decline resulted in a test of major support at the 200-day moving average at 2,083 to 2,069, the 61.8% retracement of the June 27 to Aug. 15 advance. According to retracement theory, that is about the deepest a decline can go and still be considered corrective rather than the beginning of a new bearish trend.
Oil Prices Remain Volatile
In mid-September, I pointed out that oil prices had broken down from three months of sideways investor indecision, which targeted significantly lower prices. But prices sharply reversed in late September after OPEC announced plans to lower production.
This spike in prices confirmed a new bullish pattern that targeted an eventual rise above the summer highs. However, this pattern was also negated last week, as doubts about the planned cuts drove prices back down to their September lows.
So, after a lot of meaningless volatility, oil prices are right back where they started in September.
An artificially controlled market like crude oil is often the hardest to predict because there is a lot more than simple supply and demand influencing prices. Still, I always keep a close eye on oil because it is a key barometer of global economic activity.
Since day-to-day volatility is making oil extremely difficult to trade, I chose the next chart to provide a bigger picture look at what we might expect from oil prices heading into next year. It plots the annual seasonal pattern in West Texas Intermediate (WTI) crude oil prices based on data since 1977.
We can see that November is the seasonally weakest month of the year, and that it also represents the midpoint of the three weakest months of the year. Historically speaking, prices begin to gradually increase at the start of the year, with March, April and May being some of the seasonally strongest months.
While the seasonal trend points to more weakness between now and year end, acute seasonal strength early next year indirectly supports my outlook for an overall strengthening of the U.S. and global economies in 2017.
Gold Resuming its 2016 Advance?
In the Oct. 10 Market Outlook, I noted SPDR Gold Shares (NYSE: GLD) met my $122.75 downside target and said gold prices were now at a major decision point from which their 2016 advance must resume if still valid.
GLD actually bottomed as I wrote that report, and then managed to remain near its 200-day moving average (major trend proxy) for the next several weeks before moving back above its 50-day moving average (minor trend proxy) at the end of last week. This indicates that gold's 2016 advance is not only still intact, it actually appears to be resuming.
Rising gold prices, and rising commodity prices in general, typically coincide with a weakening U.S. dollar. This combination would also support my intermediate-term bias toward a strengthening U.S. economy into 2017.
Putting It All Together
The VIX's spike to 23, especially while the benchmark S&P 500 is testing major underlying support at its 200-day moving average, sets up favorable conditions for the stock market to rally into year end -- and possibly into early-to-mid-2017.
We got a big push in the right direction on Monday, as stocks rallied following the FBI's statement that Clinton should not face criminal charges after a review of new emails.
Meanwhile, 30 years of seasonality data suggests an eventual rise in crude oil prices into early to mid-2017. And a strong rebound from major support in gold prices also supports a strengthening U.S. economy next year.
Barring any unforeseen icebergs, it looks like we may be in for some smooth sailing into year end.
Editor's note: A win for Donald Trump could certainly cause stocks to sell off. But Profitable Trading's Jared Levy just told members of The Insider's Club about a group of stocks that could rally no matter who wins the election.
Instead of buying the ETF that tracks this sector, though, The Insider's Club uses an extra layer of protection that dramatically increases their chances of success. For this trade, it allows them to profit whether the ETF rallies after the election, stays put or even falls as much as 5%. Everyday traders can do the same. They just need to be let in on this one little secret.
Many investors hold strong opinions about the 200-day MA... but is it actually important?