Markets will likely be weak until late October, analyst says

What to expect from the markets this fall? For the short term, at least, more of the same.

Thats the take from Paradigm Capital analyst Aazan Habib, who says equity indices are following the seasonal script closely right now, signalling weakness until at least mod-October.

The S&P 500 is testing the August lows and 4300 support zone as tactical momentum indicators enter oversold territory,” the analyst argued in research update to clients September 24. “While an oversold bounce/relief rally seems probable from these levels, the seasonal composite suggests the corrective phase has room to run into mid-October. The daily chart is forming a head & shoulders distribution pattern that measures downside to the 4050-4100 zone, an area that contains the upward sloping 200-day moving average. We could see a scenario where the index bounces to fill the gap between 4374 and 4400 before continuing lower to this downside target.”

But Habib says all the new is decidedly not doom and gloom ,especially for investors with a longer window.

“From a longer-term perspective, this seems to be a corrective phase within an ongoing uptrend and environment of breadth expansion,” he wrote. “Our sector rotation risk appetite models and breadth indicators continue to suggest a primary bull market environment for now. In Canada, the TSX Composite and TSX Small Cap indices also printed bearish candlesticks last week but remain in longer-term consolidation patterns with neutral momentum profiles.

So what sectors should you be looking at? The analyst says keep your eye on one in particular.

“Energy remains at the top of our breadth rankings while Financials are starting to demonstrate early signs of underlying leadership in response to the start of a potential shift in the yield curve. We’re not seeing signs of sustained defensive rotation yet despite the index chop.