Market Lives up to Its October Historical Profile

For much of the year, the stock market has zigged when it should have zagged.

Investors try to use historical data to anticipate the near-term direction for equities. True to form, Mr. Market loves to upend a perfectly good pattern.

By all accounts, the month of September is supposed to be the absolute worst time of the year to be invested. Yet it represented a time when the major averages hit new all-time highs. Go figure. And then, just as it looks as if S&P 3,000 is within easy reach, bond yields spike higher and stock prices tumble lower. So, let’s asses the damage and try to make sense of it.

The stock market suffered some deep technical damage this past week with the Dow, S&P 500, Nasdaq and Russell 2000 all trading below their respective 200-day moving averages. Friday’s attempt to retake these critical technical levels is where I expect the bulls and bears to slug it out over the next few trading sessions. Most all of the 11 market sectors have corrected, with utilities and telecom trading best, while some subsectors of the market are definitely showing pronounced weakness — namely transportation, real estate and materials.

Given the four biggest banks reported earnings on Friday to kick off earnings season, it’s clearly evident that a lot of repair work is in store for the major averages if the bulls intend to retake the high ground. Third-quarter earnings season gets into full swing next week and should provide some much-needed reassurance to investors about the well-being of the economy and the prospects for the market to regain its mojo for a year-end rally.

The fourth quarter and first quarter are historically the two strongest quarters for making money in stocks. Coming into October, the market was overbought when looking at nearly every indicator. What exacerbated the sell-off was algorithmic computer-generated sell programs that trigger when certain technical levels are violated. This modern stock market is dominated by computerized trading, which accounts for up to 70% of the average daily volume on the NYSE and the Nasdaq.

The power of program trading cuts both ways, as we have learned from time to time, and this past week is no different than prior times we’ve seen what looks like the bottom falling out. The issue this time is that it’s happening from much higher levels, so it appears more severe in terms of total points shaved. However, the percentages are garden variety.

The Dow has corrected 6.7%. Also losing value were the S&P, sliding 6.5%; the Nasdaq, slipping 8.3%; and the Russell 2000, dropping 11.1%. Assuming forecasted S&P Q3 increases in sales of 6.5% and earnings of 19.3% come in at or above those levels, the path of least resistance should be higher.

Look for the market to chop around for a few more days and then take its cue from when the numbers start flowing in from earnings. Let’s not lose sight that when looking at the rest of the global markets, the United States is the go-to equity market of choice and likely will remain so for the balance of 2018. With that as a backdrop, volatility will probably remain elevated with all that is going on with the mid-term elections, the trade war with China, the distressed emerging markets and the nervousness in the bond markets. With that said, there are always opportunities and within my Hi-Tech Trader advisory service, I utilize the power of artificial intelligence to select great tech stocks to buy that are recommended with a corresponding call option strategy to satisfy stock and option traders.

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