The markets are a Nightmare Before Christmas, Paradigm says

We are supposed to have the wind at our backs about this time of the year, but the markets are persistently spooky.

Is there hope for a rally? Sure says Paradigm Capital analyst Aazan Habib, who says there also may be a little more pain to endure.

In a research update to clients October 29, the analyst assessed the outlook for commodities, fixed income and currencies and equities.

With regard to equities, Habib says we in a “risk-off” environment, but says he is exercising caution.

“Breadth and sentiment (are) entering oversold territory but room to go before extremes; staying cautious until we see evidence of a reversal or capitulation,” he said. “We have been using a breadth model based on the 10-day EMA of the NYSE McClellan Summation Index to guide our view on equities. This model has been in a risk-off configuration since early August, keeping us cautious as we progress through this risk looking for signs of either a sustainable upside reversal or capitulation to become more constructive. There are signs of oversold conditions in certain sentiment/positioning/momentum/breadth indicators, but we are not at levels consistent with capitulation lows.”

The analyst says he is watching support levels of 4050 and then 3800 on the S&P 500 and the 18,000 level on the TSX.

While the emergence of Halloween costumes and candy signal the end of what can sometimes be a frightful month, the analyst still finds it hard to go all-in on optimism.

“Seasonality is supposed to become a tailwind as we approach the November-January period,” he concluded. “After closely following the seasonal composite so far this year, performance has started to diverge as the fall seasonal correction has morphed into a deeper risk-off phase.”