Buy the Dip

You may be asking - What dip?

Last week, I posited the possibility of a shallow dip. We got one - sort of, unsatisfactory as it was. But it did exhibit all the necessary attributes. Sentiment declined sharply. The VIX spiked. Bonds outperformed stocks. Financial fraud made front-page news. All that this correction lacked was magnitude.

The market is undefeated when it comes to confounding the consensus. The seasonal weakness was pretty temporary. Earnings are now back in the driver's seat as a market motivator. And judging from the early returns, like GM's beat this morning and the banks last week, they will be good. Apple's rally has also boosted sentiment, driven by the impressive iPhone 17, which has spurred sales. So much for my sell recommendation on Tim Cook & Co.

Stocks and bonds have been negatively correlated recently, as the slowing labour market is giving the Fed an incentive to ease. This is despite the stubborn inflation data, which is unable to drop to the target range near 2%. The current narrative of this market is that tariffs are less than feared as a driver of inflation, and the labour market weakness has gained the upper hand in Fed policy deliberations.

Bond yields, aided and abetted by Fed loosness, are a strong tailwind to equity valuations. As I argued last week, they are the only adult in the financial room now. When the bond market starts to price in next year's inflation reacceleration, I'll get worried, but it's full steam ahead for now.

Stock/Bond Ratio; S&P ETF

Gold flared off as a shock absorber to the government shutdown uncertainty. Today's massive sell-off in the precious metal cements the bottom for risk behaviour. Sentiment should start to improve from here. The debasement trade has peaked.

SP500/Gold Ratio; AAII Bull/Bear

As we enter the positive October-March seasonal period, the rally should show signs of broadening. The prospect of easy financial conditions leading to a '26 consumer rebound will be enough for the bull case to continue, as left behind cyclicals and smallcaps begin to participate.

Despite the shallowness of the correction, I am reversing my position on stocks. Sell gold, buy stocks.

As my dear, departed friend Pat Taylor used to say, "Keep buying a bull market until the last day." That day isn't here yet.

Risk Model: 1/5 _ Risk Off

RSI levels have corrected sufficiently to allow for a reacceleration. This is despite a market that remains at an overbought level, as shown by a stubbornly high % above the 200 DMA. That's a very shallow correction, and progress on the rally may be slow until a catch-up phase occurs. I expect the AAII readings to bounce and the VXV indicator to reverse shortly. The PPO ratio (% above the 200DMA) shown below has been above the 10% level for two months now.

XIU ETF; %Above 200 DMA - RSI - Price

Sentiment will need to bounce here, so the response to earnings will be the key to any rally.

AAII Sentiment

Copper is very oversold relative to gold. But of the two most-traded economically sensitive commodities, oil is even more so. Oil is very cheap in real terms. Economic reacceleration is likely to bottom this ratio; however, it's only for bottom-fishers.

Oil/Copper Ratio