Entering into the heart of the third-quarter earnings season, many of the S&P 500 companies that have reported their quarterly financials are crushing their numbers so far. However, a few companies that have missed their forecasts have also been punished. In the next week or so as investors prepare for the final quarter of the year, we suspect many will try to maintain their performances if they are outperforming. And, for the unfortunate investors that have underperformed the market they will begin to take higher than average risks to catch up to a rising market.
So, what do we need for the SPX to breakout and record new all-time highs? In the previous 10/21/19 blog "Nearing technical breakouts" we highlighted key technical levels that will confirm price breakouts for such key US indexes as: S&P 500 Index (SPX), Dow Jones Industrial Average (INDU), NASDAQ Composite (COMPQ) and S&P 600 Small Cap Index (SML). Expanding market breadth and strong price momentum are likely to play a pivotal role in sustaining these technical breakouts.
However, one of the most important factors to consider for a sustainable SPX price breakout is to address the question as to whether there are enough active participations to support a key technical breakout to new all-time highs. Since SPX is a market-cap weighted index it will be directly impacted by a handful of very large market-cap weighted S&P 500 names and by a few very large market-cap weighted S&P 500 sectors. Please refer to our recent weekly report on the technical review of the components of S&P 100 Index to identify the potential market leaders for the last quarter of the year.
From the S&P 500 sector perspective, we suspect four (4) S&P 500 sectors may play crucial roles as to when and if SPX will record new all-time highs. These sectors are: S&P 500 Financials (XLF - 12.9% market-cap weight as of 9/30/19), Healthcare (XLV - 13.7%), Consumer Discretionary (XLY - 10.1%), and Industrials (9.3%). Note the four sectors when combined accounts for 46% of the overall SPX by market capitalization. In addition, two of these sectors are economically sensitive and as such are very sensitive to US business cycles and consumer spending. Attached below are these four important S&P 500 sectors with corresponding key technical levels.