Dear Reader,
CJ here!
I love seasonal trends. There’s nothing simpler – and in most cases effective – than the seasonal trends that have been consistent in the markets for decades.
Think of them as the market’s “trade winds.” You can usually rely on them to guide stocks higher or lower based simply on the calendar.
Did you notice that I said “usually?” Let’s get into that for a minute because it has everything to do with where the market is going over the next two months.
First, let’s answer the question “why do seasonal trends work?”
It’s actually a very simple answer… they work because the market believes in them. That’s it. Think of seasonal trends as “self-fulfilling functions” of the market. Kind of like “if you build it, they will come.”
That’s what traders and investors are waiting for right now. The most powerful trade winds that the market has known over the last 30 years.
I’m talking about the October to December bullish seasonality.
We’ve been talking about this surge in stocks for the last month in preparation. I’ve expected volatility and additional selling, but the result of that pain is usually an incredibly strong fourth quarter.
How strong? Let’s look at the results over the last 30 years…
Since 1993, the S&P 500 has banked an average return of 1.9%, 2.2% and 0.5% for the last three months of the year. What makes this better is that the winning percentage for each of these months is also among the best on the calendar.
The table below displays the winning percentage for the S&P 500 by month. gain, October through December posts the strongest trend of the year as all three months post win/loss percentages of 65% or better.
Given this, I think we should change “Sell in May…” to “Buy before Halloween before stocks Scream higher.” It needs some work, I know, but you get the idea.
Now, historically we’re in the sweet spot for buying in ahead of the fourth quarter surge. October has a bad reputation for stocks for a reason. Investors still have memories of “Black Monday” and other extremely volatile trading days.
But historically October is the “comeback kid” month that sparks optimism and heavy volume buying all the way through the end of the year.
That’s the good news. Now let’s talk about why I said “usually” above.
In the last 30 years only 10 of the Octobers have resulted in losses. Of those 10, only two have seen losses in the following November. Care to guess which years? I’ll hold off on that detail for another minute, keep reading.
In its current state, the market can’t afford to have this seasonal trend fail.
This seasonal trade wind is already facing some daunting headwinds.
- The Economy
- The Fed’s “Higher and Longer” mantra for interest rates is started to have the desired effect of slowing demand for goods and services
- The housing market is beginning to show signs of fatigue as homebuilders are offering incentives never seen before (not even in 2008) to get inventory off their books.
- Signs that the everyday consumer is beginning to crack are becoming more apparent as higher interest rates on credit cards and lower savings balances take their toll on household budgets.
- The Market
- Bond prices continue to plumet to levels not seen since 2014 as the bond market appears to be forecasting an ominous outlook for 2024.
- Yields continue to press higher, despite market hopes for lower rates in 2024.
- The small cap Russell 2000 Index is currently flirting with a break back below its $170 price level. This would solidify the “risk on” index’s long-term bear market trend which would weigh heavily on the S&P 500 and Nasdaq 100 indices.
- Sentiment
- Market sentiment is not flashing signs that investors are too awfully worried about stocks.
- The CBOE Volatility Index remains well off its highs.
- Investors polls like Investors Intelligence and the AAII Sentiment Poll also reflect a lack of fear towards this market.
Let me “bottom line” this for you.
The market’s fundamentals a questionable at best.
The technical picture is neutral to slightly bearish.
Despite both very important factors, investors appear to be looking forward and “hoping” that the fourth quarter seasonality will be strong enough to overcome its mounting risks.
This is a dangerous situation for stocks.
Now let’s look at the two years out of 30 when the S&P 500 failed to answer the call of the October bounce.
If you haven’t guessed, 2008 and 2000 were the two years that we saw consecutive losses in October and November.
In both cases, the markets accelerated lower into the end of the year, tacking on even deeper losses. This is partially due to the same phenomenon that drives the bullish seasonality trend, investor psychology.
Think of it like a bad Christmas gift. If a child expects a great gift on Christmas morning and only gets socks and underwear the whole day is likely soured. The market is no different.
Failure for an October bounce to reveal November strength shakes the foundation of investor’s belief or hope that the fourth quarter will deliver. That disappointment will cause a shift in investors mindset from “hope” to “fear” which will accelerate the market’s selling into the end of the year.
How do you and I trade this?
First, I’ll spend this space identifying the market’s “tipping points” on Thursday. What levels to watch on the S&P 500, Nasdaq 100, and Russell 2000. This will provide specific “must win” levels for the market to maintain hope for a fourth quarter rally.
Second, I’ll identify two of the sectors that I am considering for the fourth quarter. One bull and one bear of course as this market is far from making a decision on its next 10%+ move.
Understand that there is a 10% move coming over the next three months.
I’ll put you ahead of it right here.
Talk soon…
Chris Johnson
Quantitative Specialist
P.S. At 1pm ET tomorrow, Wednesday, October 18, my friend, Tom Gentile, is hosting the next session of his AI System Open House. You’ll get five FREE live trading and coaching sessions with Tom and his team… AT LEAST 3 FREE AI-generated trade recommendations with full instructions, live step-by-step training to place your trades… and so much more. Click here to sign up now!
