On Wednesday, 25 October, the S&P500 closed at 4186; a clear violation of the 4200 level. At this point, a continuation of the down trend is much more likely. We now have consistent lower highs and lower lows since the top in early August. The break below 4200 also changes my primary Elliott Wave count. All indications are that wave C or 3 is in process.
If the correction that began at the top in January 2022 is simply a reversion to the mean, wave C will likely complete at around 3350 and the up sloping trend line. The alternative is that the January 2022 top is the culmination of a Grand Super Cycle. In that case, we are in the early stages of a much bigger (5 wave) decline that will take several years to complete, and many years to get back to new all time highs.
The biggest concerns in the short term are the dollar and the 10 year yield. The chart of the dollar shows a clear 1 leg from mid-July to the beginning of October. Over the past 3 weeks, the dollar has carved out an a-b-c correction. If this wave 2 is complete, the dollar is about to blast off to the upside for wave 3. A pull back to the Fibonacci 0.236 level is the minimum for a wave 2 correction. The preference would be a 0.382 pull back and more time in wave 2 relative to wave 1. It's possible that wave 2 is not complete but, we should assume it is complete unless/until the wave structure proves otherwise.
Why is the chart of the dollar so important? As you can see below, when the dollar is rising, the S&P500 is falling. When the dollar is falling, the S&P500 is rising. A wave 3 breakout for the dollar is VERY bearish for the S&P500.
Interest rates or yield is also a serious drag on the S&P500. The TNX (10 year yield) is in a perfect 5 wave pattern. By connecting the major lows and running 2 parallel lines to the major highs and the wave 3 high, we have a likely end point for yield. As yield approaches the upper channel lines, its easy to see that we could be at 5.5-6% yield by the end of 2023. The weight on stocks at that point, if not before, would likely break something in the economy and cause the anticipated 2024 recession.
Bottom Line
A Q4 rally is not off the table but, the close below 4200 makes a meaningful Q4 rally very unlikely. If the dollar and yield continue higher, as it appears they will, the stock funds are in big trouble. In the short term the market could rally buy, as Adam from Wealthion likes to say, "It's like picking up pennies in front of a steamroller." The downside risk is MUCH higher than potential upside gains at this point.
If you are risk averse, the G fund with a relatively high rate of return is your safe haven. If you are more aggressive, you could hold out for a Q4 rally. Just do NOT get complacent...
New Grow Model Portfolio Allocation: 100% G Fund
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