The S&P 500 may experience a shift in its historical positive seasonality for October and November due to rising geopolitical risk. The US 10-year Treasury yield is approaching 5.20% and a break above this level could lead to a further increase towards 6.87%. The market breadth of the S&P 500 has been declining, with only 38% of its component stocks currently above their key 200-day moving averages. If the S&P 500 breaks below the key support level of 4,140, it could trigger a major downtrend. The rally in risk assets, such as global equities, has shown signs of instability due to a swing in sentiment from over-pessimism to over-optimism. This optimism was driven by the safe haven status of US mega-cap technology stocks and their strong balance sheets, as well as the perceived productivity revolution of artificial intelligence. Our previous analysis predicted a risk-off scenario based on intermarket analysis and various indicators. The S&P 500 has already experienced a decline from its recent high, with similar losses seen in the Nasdaq 100 and the small-cap Russell 2000. Despite historical trends suggesting positive performance for the S&P 500 in October and November, the current geopolitical risk adds uncertainty to the market. The conflict in Israel-Hamas and potential disruptions in the oil market could impact the overall sentiment and contribute to an increase in the US 10-year Treasury yield. A higher yield would result in a higher cost of funding and could affect longer-term revenue expectations for mega-cap stocks. Additionally, the market breadth of the S&P 500 has been weakening, which, combined with the uptrend in the US 10-year Treasury yield, increases the likelihood of a major bearish breakdown in the S&P 500. This could initiate a new phase of a major downtrend.
