This year, the S&P 500 has greatly underperformed its average 18% return that it historically provides during the third year of a Presidential election cycle. But then, a lot seems to be different this year as correlations across most asset classes are high and prices are buffeted more by news events than fundamentals (which has made stock picking quite challenging).

Last week, the S&P 500 put up its best week of the year, closing above key psychological levels and breaking through bearish technical resistance, with bulls largely inspired by the dovish FOMC meeting minutes. But this year’s market has been news-driven and quite difficult for traders to read. Even our fundamentals-based and quality-oriented quant models have struggled to perform.

Uncertainty about the health of the global economy led investors to flee U.S. equities during Q3, primarily driven by worries about China's growth prospects and the Federal Reserve’s decision to not raise rates. Sure, there are plenty of real and perceived headwinds, but on balance it seems that a recession here at home is not in the cards. And when you consider sentiment and the technical picture, it appears that a continuation of Friday’s bounce is in store.

Although the large caps set new highs early on Friday, small caps and NASDAQ have not come close to their prior highs. Friday closed with extreme weakness across the board, and it was on high volume. The technical picture and our fundamentals-based sector rankings have both taken a bearish turn, so we might see more weakness ahead.