As the end of September passes into October, the uneasiness of the stock market may get worse. While we know September for its wild rides, October by far ranks as the “spookiest” month of the year, and this year it’s not just Halloween that’s going to scare you.
Aside from all the October stats I plan on going over, it’s important to remember the economic calendar this week. Wednesday is the ADP employment report, Thursday is the Challenger job-cut report and Friday is the jobs number which we think will surprise—if a shut-down Labor Department is able to issue it.
October: What’s the big deal?
In an already unsettled world, the month of October is known for its surprises. It is also known as the “jinx” month because of the crashes in 1929 and 1987; the 554-point drop on October 27, 1997; back-to-back massacres in 1978-1979; Friday the 13th in 1989; and the credit crisis meltdown in 2008.
10/10/08 marked the “Dow’s worst week in history on Wall Street” when the Dow lost 1874 points or (-18.2%) in one week. For whatever reason, the markets tend to send mixed directional messages during October.
October the Bear Killer
There have also been some wicked bottoms made in October, and that is why the month is also known as the “bear killer.” October has turned the tide in post-WWII bear markets in 1946, 1957, 1966, 1974, 1987, 1990, 1998, 2001, and 2011. The Dow made its previous 1589 top in 2007, the 20-year anniversary of the 1987 crash, then droppd 2.6%.
The end of October ends the “worst 6 months” for stocks and starts the best 6 months, from November to April. October is a great month to buy with solid gains from 1993-2007. And last but not least, October 2001 was the the second month to gain 1,000 Dow points.
Best 6 Months
The best 6 months for stocks starts November 1 and goes to April 30. While some people may dispute it, the stats speak for themselves. There are definitely good and bad seasons for the stock market and the fall is not a good time, but the year end tends to be.
The top performing months are November, December, January, March and April, dating back to 1950. The best 6 months gained 14,654.27 Dow points in 62 years, while May through October lost 1,654.97 points. The S&P gained 1,477.55 points in the best six months and lost 97.71 points in the worst six. For many traders, this is reason enough to take the summer off.
If the markets didn’t have enough historical reason to be spooked going into October, our government just handed us–and the world–a lot of avoidable uncertainty about the U.S. dollar and our ability to keep our house in order. It raises a broad range of questions and concerns about what the rest of the month will bring.
In order to get it directly from the source, we asked our good friend Jeffrey Hirsch from the Stock Trader’s Almanac to give us his view on how October might play out and where he expects the S&P at year end.
Last Monday, when I posted on the Dow’s Down Friday/Down Monday stats one of our followers, Andy Dillon, inquired if we had statistics on the equivalent data for NASDAQ Down Friday-Down Mondays (DF-DM). Of course we do. Today’s market decline makes it two DF-DM in a row and the fourth in the last eight weeks for the Dow. A cluster like this of DF-DM after suffering only two others the rest of the year is all the more troubling. Here are the stats for the NAS.
Today’s NASDAQ loss has triggered the fifth DF-DM of the year and the third in the last 6 weeks. In the nearly fourteen years since 2000, there have been 173 DF/DM. In all but 7, NASDAQ was lower sometime in the 90 calendar days following the DF-DM. Declines have averaged 10.6%. Since the bottom in March 2009, the subsequent decline has been milder, averaging 6.3%.
On the eve of another potential government shutdown over another budget impasse with debt ceiling and Affordable Care act battles bubbling up on the front burners as well, my outlook for October is a bit less sanguine than it was a week ago.
As a card-carrying Almanactarian, it should come as no surprise that I come into the month of October with an admittedly negative bias due the month’s penchant for big surprises to the downside. However, as you all may remember, though the month is often frightful for stocks, it has also brought many treats to traders and investors alike. In fact, we like to call it the “bear killer” and it is historically the seasonally best time to buy stocks, especially small caps and techs.
So bearing in mind the above comments on the second DJIA DF-DM in two weeks and four in the last eight (3 in the last 6 for NASDAQ), yes, the market will get past this troubled period, but likely with more of a mark than it had in September. If D.C. fails to keep the government open and the political gamesmanship drags on, we may end up in a full-fledged bear sooner than later. The more likely course is a short-term patch deal and a 5-10% correction along the lines of the action we experienced in August followed by a year-end rally that stalls at the recent high with the S&P finishing the year in the low 1700s. Then this whole political brouhaha heats up again in early 2014 when the midterm election rhetoric cranks up and we may end up with a real bear market.
The Asian markets closed mostly higher and Europe is following suit, with 8 of 12 markets up. Today’s economic calendar includes six different economic releases: motor vehicle sales, Gallup US ECI, Redbook, PMI manufacturing index, ISM manufacturing index and construction spending.
Blame it on the Democrats or blame it on the Republicans, but the stalemate has forced the first U.S. government shutdown in 17 years. Lawmakers failed to agree on a federal budget by the midnight deadline, which will start a partial shutdown that will put up to 800,000 federal employees out of work and will shut down some government programs / services. At 3:00 am CT the ESU is up 8 handles at 1682.25. For the last two weeks the deadlock has helped push the S&P to its largest losing streak of the year, down five days in a row and down 7 out of the last 8 sessions. After all the shorts were shaken out during the Fed’s no-taper, the sellers came back in force.
Our view: Welcome to “Obamacare” and the government shutdown. As we expected, the S&P futures rallied off the news. With the current shutdown under way, this Friday’s Labor Department monthly employment report won’t be released if the government doesn’t reopen by then. While the shutdown is big, the U.S. debt ceiling is a much bigger problem. We lean to selling the early rally and then buying the weakness. Like the downside, the ESZ is packed with upside buy stops.
As always, keep an eye on the 10-handle rule and please use stops when trading futures and options.
- In Asia, 9 of 11 markets closed higher: Shanghai Comp. up 0.68%, Hang Seng down 1.50%, Nikkei up 0.20%.
- In Europe, 8 out of 12 markets are trading higher: DAX up 0.62%, FTSE down 0.19%.
- Morning headline: S&P Futures Seen Higher Despite Government Shutdown”
- Total volume: 2.14mil and 6k SPZ traded
- Economic calendar: Motor vehicle sales, Gallup US ECI, Redbook, PMI manufacturing index, ISM mfg index and construction spending.
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