Navigating the Volatile Stock Market: Strategies for Savvy Investors

The stock market faced another test last week, with bearish sentiment running high despite the near-certainty of a rate cut. Despite the challenges, the S&P 500 managed to close the week up 100 points, or 1.7%, with the Invesco QQQ Trust (QQQ) closing 2.7% above its low.

Unlocking the Potential of Market Volatility

Valuation Concerns and the Fed's Impact

While some investors remain concerned about high valuations, with measures like price-to-book and price-to-sales well above historic averages, technical analysis suggests that the Fed's rate cuts have historically been a positive catalyst for the market. According to Ryan Detrick, chief market strategist at Carson Group, the S&P 500 has been higher a year later every time the Fed has cut rates when the index was within 2% of an all-time high, with an average gain of 13.9%.

Navigating Recessionary Fears

Despite the positive technical indicators, recessionary fears are still keeping many investors on the sidelines. However, an analysis of the market internals and advance/decline lines ahead of the FOMC meeting projected new highs, suggesting that the market may be poised for a breakout.

Shifting Consumer Confidence and Its Implications

The slightly improving bullish sentiment at the start of the week was dampened by the release of the Consumer Confidence Index, which showed a significant decline from August's six-month high. The drop in confidence was particularly steep for consumers aged 35 to 54, while those under 35 remained the most confident. The under $50,000 income segment also showed the largest drop in sentiment, while the $100,000 and above group remained the most confident.

Anticipating the Election's Impact

Based on the chart of the University of Michigan Consumer Sentiment, it is the author's view that the consumer's outlook for the economy is likely to improve as we get closer to the election. The latest report, which is set to be released this Friday, may provide further insights into the shifting consumer sentiment.

Analyzing the Invesco QQQ Trust (QQQ)

The weekly outlook for the stock market has not changed significantly after last week's action or the price action early this week. However, the outlook for growth stocks has improved, as the Invesco QQQ Trust (QQQ) is up 1% so far this week and has exceeded its August high. The R1 monthly pivot resistance is at $499.36, and the July high is at $502.81. The Nasdaq 100 Advance/Decline line is still in a strong trend, and the relative performance (RS) is close to completing a bottom formation, which could signal that the QQQ is once again leading the S&P 500.

Navigating the Growth vs. Value Landscape

The growth/value ratio chart of the iShares Russell 1000 Growth (IWF) versus the iShares Russell 1000 Value (IWD) closed above its 20-week EMA last week, which has been a helpful indicator in determining whether to favor growth or value stocks and ETFs. While the bullish divergences in the MACDs were a positive sign for growth stocks in late 2022 and early 2023, the signals are not as clear currently, as the MACDs are still negative.

Identifying Opportunities in the Tech Sector

Despite the overall market sentiment, there are some positive signs from the tech sector, as the charts of some semiconductor stocks look quite strong. The author remains on alert for a 1-2 day sharp pullback as we move into October, but believes it will present a buying opportunity for savvy investors.