Are Investors Too Optimistic?

October 26, 2022  |  Michael Reilly

Stocks rallied last week into last Friday’s close – an encouraging development! 

But dare I say… investors are optimistic. 

You see, if you’ve been paying attention, you’d know that many Fridays this year have experienced sizable sell-offs. 

Why? Because traders wanted no part in holding positions over the weekend. The risk was too great. 

What kind of bad news would lead to a sell-off at the following Monday’s opening? Traders didn’t want to get trapped in positions and see losses mount.

But for those brave souls that held positions last week and through last night’s close of this week, the risk has been rewarded, as the S&P rallied 5.26% (10/19–10/25).

But how much more should investors expect? Is this rally sustainable?

Without the benefit of tomorrow’s newspaper today, I‘d suggest the first hurdle will be a move above the September low – around 3880. 

That’s an area that has acted as previous support going back to May and coincides with the 50-day moving average as well.

So here’s the deal: If the S&P can’t break above that level, or runs into heavy resistance, all bets are off and a retest of the October low wouldn’t be a surprise.

But let’s be optimistic… let’s say the S&P slices through the 50-day and continues to rally. What’s next?

Well, there’s more substantial overhead resistance between 4000 and 4200.

So, until we get a break above 4200, any rebound should be viewed within the context of a continuing bear market. 

But does that mean you shouldn’t participate?  No, it means be prudent, be nimble. 

There is opportunity if you know where to look.

Not only has the S&P 500 index moved higher over the previous five trading days, all 11 sectors are showing positive returns as well.

The Energy sector remains the market’s strongest sector as it has been all year.

Let’s look at some charts.

Here’s the Energy Sector SPDR (XLE) – it moved above its August peak to reach the highest level in four months. 

And here’s Chevron – it also broke above its August highs.

Then there’s Exxon Mobil – their price ran right through its previous highs of 2022 to reach a new all-time high (2014).

And Oil Services are also breaking out. Check out the VanEck Vectors Oil ETF (OIH).

The next move for Chevron, XLE, and OIH is to join XOM and move above their respective June highs.

We know Energy has been the outlier all year – that strength isn’t letting up. 

Opportunities continue to show up in the space for those savvy enough to find them.

Keep your eye on the price – it’s the only thing that pays.

Until next week, invest wisely…






P.S. To find out how Rowe Wealth can help you profit through whatever the market serves up next, schedule a free 1-hour consultation with us now

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