Most major U.S. indices closed higher last week, reversing the previous week’s negative close as choppy price activity continues. However, the market is hardly out of the woods just yet. The market-leading Russell 2000 closed lower last week while most major indices are still negative for the year.

#-ad_banner-#Recent volatility reinforces my belief that this is an important inflection point for the market from which a fourth-quarter recovery should begin unless we are in fact entering a global bear market. I’ll talk about that in more detail later in the report.

Moving to market sectors, the biggest expansion in sector bet-related investor assets over the past one-week and one-month periods was in energy, according to Asbury Research’s own ETF-based metric. 

As long as this recent asset expansion continues, the energy sector’s outperformance is likely to continue. A strengthening energy sector would suggest improving global demand and should help put a bid under global stock markets.

At the other end of the spectrum, the table shows the biggest contraction in assets over the past one-week, one-month and three-month periods came from financials. This has been triggered at least in part by the sharp decline in long-term U.S. interest rates amid a flattening yield curve. This trend cuts into the profitability of banks.

‘Tis The Season For A Rally

One of the most important market influences to be aware of this month is seasonality. The chart below shows that September is by far the seasonally weakest month of the year in the S&P 500 based on data since 1957. October begins a fourth-quarter rebound that culminates in December, which is the strongest month of the year.

On average, the S&P 500 has closed 0.9% higher in October since 1957. The red line on the chart indicates the index has posted a positive close in October 62% of the time.

U.S. Rally Could Be Derailed Overseas

Earlier in the report, I said a fourth-quarter advance was likely to begin in the U.S. stock market at or near its current level unless a global bear market is emerging. The next chart is one way to determine this. 

Germany’s DAX has been hovering just above its September 2011 uptrend line, currently at 9,407, since late August. A similar trendline is also being tested in the Japanese Nikkei 225 index. Both indices are positively correlated to the S&P 500.

As long as this trendline in the DAX holds, it will support the seasonal recovery in the S&P 500. On the other hand, a collapse below 9,407 in the DAX would warn a global bear market is emerging.

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Gold Update

In the Aug. 17 Market Outlook, I pointed out that, according to data from the Commodity Futures Trading Commission (CFTC), “smart money” commercial hedgers saw value in gold prices near $1,100 per ounce. Since then, gold prices have been drifting sideways, holding above this “value area” but unable to sustain a meaningful rally.  

I have regularly discussed the total net assets invested in the SPDR Gold Shares (NYSE: GLD) as a means to determine if there is enough day-to-day bullish conviction in the marketplace to support and sustain a rally from $100.

Even though $107.44 — the Sept. 22 low and the stop point I mentioned last week — was broken on an intraweek basis, GLD came back strong on Friday. It also managed to remain above both its 50-day moving average and July 24 uptrend line.

Most importantly, the highlighted area on the chart shows the total net assets invested in GLD remained above their 21-day moving average, indicating an emerging trend of quarterly expansion. As long as this continues, it should fuel a sustainable rise in gold prices. 

Putting It All Together 

Almost 60 years of seasonality data suggest Friday’s big bullish reversal in the U.S. stock market may be the beginning of a sustained advance into year end. This is supported by recent investor asset flows into the economically sensitive energy sector.  

However, a sharp decline in long-term U.S. interest rates last week amid a rally in gold prices indicates that at least some investors are still apprehensive about the global economy and are buying defensive assets to protect against further weakness.  

I will be closely watching overseas stock markets this week — in particular the German DAX and Japanese Nikkei 225 — for a potential leading indication of where U.S. stocks are ultimately headed between now and year end.

This article was originally published on ProfitableTrading.com: Is A Global Bear Market Emerging? The No. 1 Chart To Watch