Stronger Setup for a Year-End Rally with Improving Earnings and Falling Rates

On Wednesday, October 21st, 2026, most major indices closed higher, signaling a solid day for the market. The Volatility Index (VIX) notably fell by 3.64%, dropping below the 17 level. Tom Bowley, chief market strategist at earningsbeats.com, considers the 17-20 range a 'gray area' where volatility begins to pick up but is not yet a panic stage. He indicates that a drop below 17 suggests the market is starting to settle back down.

Seven out of the eleven sectors closed higher on Wednesday, with technology leading the gains, continuing its role as a leader throughout the secular bull market. In contrast, communication services showed weakness, approaching crucial support levels. Defensive sectors such as healthcare, consumer staples, and real estate all saw declines ranging from about 0.5% to 0.75%.

The Dow Jones recorded its highest close in approximately five to six weeks on Wednesday, trading about 3.5% to 4% above its support level near 51,000. The S&P 500 is in a sideways consolidation phase following an uptrend, which Tom Bowley believes could set the stage for a year-end breakout.

The NASDAQ 100 did not lose its recent price support around 28,750, bouncing back after reaching about 29,000, indicating resilience. Similarly, the Russell 2000 (IWM) is bouncing off a critical support level between 269 and 270, a level it hit at the end of the previous week. However, the transportation sector remains weak, and maintaining its September/May lows is crucial for its outlook.

The communication services sector is currently in a downtrend, but it is approaching a significant gap support level near 108. Tom Bowley stated, "I'm looking for a potential reversal at gap support near that 108 level." The sector recently moved down from a high of about 115 to 109, making the 108 level a key watchpoint.

Consumer discretionary, despite underperforming in 2026, is seen as consolidating after a robust three-year rally preceding it. Bowley anticipates this sector will hold its ground, expecting a rebound off the 107-108 area, which aligns with a long-term trend line.

The Consumer Discretionary sector (XLY) has bounced off its long-term trend line support, showing a solid October. In contrast, Consumer Staples (XLP) is facing key resistance around the $88 level after a strong October, needing a breakout to continue its upward momentum or risk a pullback towards its 20-day moving average.

Energy has broken out above $66, with any pullback to that level considered a viable entry point. Financials (XLF) are trading in a short-term range between $53 and $56, while Healthcare shows a new 52-week relative high and an absolute breakout, indicating strong performance.

Industrials are entering a seasonally bullish period, especially in November, and are approaching gap support at $163.50. For Real Estate (XLRE), the lows established in October are crucial markers for determining a potential bottom, particularly if interest rates have topped.

The technology sector is currently experiencing profit rotation, with capital moving into other sectors such as Staples, Discretionary, and Financials. This rotation, according to Tom Bowley, is a positive sign for the market, indicating that money is shifting within the market rather than exiting entirely, which helps major indices remain stable and consolidate.

Despite some downward price movements in the XLK (Technology Select Sector SPDR Fund), the presence of 'red hollow candles' on three of the last seven days indicates that prices are closing higher than their open, even with gap downs. This suggests underlying buying interest. Furthermore, the Advance-Decline (AD) line for the XLK has remained flat, which Bowley considers a subtle bullish development despite falling prices, reinforcing the idea of healthy internal market dynamics.

The utilities sector previously faced significant headwinds due to rising 10-year Treasury yields. However, as the 10-year Treasury yield appears to have potentially topped and begun to roll over, the Utilities Select Sector SPDR Fund (XLU) has shown improved performance throughout October.

This improvement suggests that if interest rates have indeed peaked, the XLU sector could see continued upward movement. The rising 20-day moving average is currently providing crucial support for the XLU, further indicating a potential recovery in this group.

VeriSign is currently exhibiting an ascending triangle pattern on its chart, signaling potential for a breakout. The stock is nearing a significant resistance level at $310, having recently closed at $307. Upcoming earnings results are anticipated to be a catalyst, potentially sending the stock into breakout territory or prompting a retest of its 20-day moving average if the report is positive.

Charles River Labs (CRL), a biotech stock in the healthcare sector, recently experienced a breakout in both its Advance-Decline (AD) line and price action, accompanied by strong volume. It is highlighted as one of the strongest performing biotech stocks on a relative basis.

Travelers Company surpassed its previous high of $397 on Wednesday, showing strong relative strength and solid volume trends. RTX (Raytheon) set a new 52-week high relative to other aerospace stocks, despite previous downward movements, suggesting significant leadership within its sector. Devon Energy is consolidating near its 20-day moving average and faces resistance at $52; a break above this level after six to seven months of consolidation could signal renewed upward momentum.

RTX (Raytheon) has shown a strong historical seasonal pattern, particularly from October through February. Data spanning 14 years since 2013, which marks the confirmation of the secular bull market, indicates that the average return for RTX during these five months is 13.3%. In stark contrast, the average return for the remaining seven months combined is only 0.5%.

This seasonality suggests that RTX is a leader within its space, especially during these months, and benefits from the industrial sector's typical strong performance in November. This historical track record implies that if money continues to rotate into industrials, RTX could resume its upward trend, potentially breaking above its 50-day moving average.

The stock market's primary drivers are earnings growth and interest rates. Tom Bowley emphasizes that if interest rates, particularly the 10-year Treasury yield, have indeed topped and begin to move lower, this could provide the underlying support for another secular bull market advance.

Companies, especially large-cap firms that heavily influence market-cap weighted indices like the S&P 500, are consistently beating earnings estimates. This strong performance in earnings season is crucial, as the market held up even when rates increased because earnings were expected to be good, and now they are exceeding expectations.

The combination of better-than-expected earnings and potentially declining interest rates could serve as a significant catalyst for further market movement into year-end. Historically, the fourth quarter is identified as the most bullish quarter of the year, further strengthening the prospect of a year-end rally.

The earnings season is set to intensify over the next couple of weeks with several major technology companies scheduled to report. Google and Microsoft are both slated to report their earnings next Wednesday. Amazon's report will follow on Thursday, and Apple is expected to release its results early the following week. These reports will be closely watched for their impact on market trends.