October Outlook: Octoberphobia Sets Up Seasonal Buy
By: Jeffrey A. Hirsch & Christopher Mistal
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September 26, 2019
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Amid all the news and noise U.S. financial markets continue to track the seasonal and 4-year election cycle patterns closely as they has all year long. Our strategy that employs and utilizes seasonality is outperforming the market. Our defensive positions in Bonds, Utilities, Staples, Healthcare and high-yield stocks that we have been deploying since spring are still beating the market.
 
October is the last month of the Worst Six Months and Worst Four Months. So it is time to begin preparing for our Tactical Seasonal Switching Strategy Best Six/Eight Months MACD Buy Signal. It can come any time on or after October 1. When it triggers we will email all subscribers an Alert with instructions on closing out our Bond ETF positons and redeploying into Dow, S&P, NASDAQ and Russell 2000 ETFs.
 
We will also be considering getting back into sectors that begin a bullish period in October such as Financials, Consumer Discretionary, Tech, Industrials, Materials, Transports as well as hand-selecting with our proprietary stock screen a new basket of fast-growing, undervalued stocks under Wall Street’s radar. Right now we are not buying anything new. We are in our seasonal holding pattern until the market shows positive momentum after October 1.
 
Amazingly, 2019 market price action continues to track the historical trend and pattern as you can see in the updated chart of Pre-Election Year Seasonal Patterns overlaid with 2019. On cue stocks paused at resistance below the highs in the third week of September and appear to be turning lower. This suggests 2019 will continue to move in synch with the seasonal moves depicted on the chart. So we expect support to be tested in the volatile month of October, which is the 2nd worst month in Pre-Election Years.
 
[Pre-Election Year Seasonal Patterns CHART]
 
The negative news flow from election campaigning, impeachment proceedings, trade wars and Mideast hostilities is likely to feed into what can become the self-fulfilling prophecy of Octoberphobia so it will be important to keep our emotions in check and stick to our system and wait for our buy signal. 
 
Unfortunately, history provides little guidance on presidential impeachment proceedings. Andrew Johnson (1868) and Bill Clinton (1998) were the only two presidents ever impeached and both were acquitted in the Senate trial. Richard Nixon (1974) resigned before his likely impeachment. These were the only three presidents to ever be the subject of formal impeachment charges. 
 
We have little market data from 1868, but after Johnson’s acquittal he failed to gain the nomination at the 1868 Democratic National Convention to run for president for another term. A stock market panic and recession ensued in 1869 as the country struggled through the Reconstruction. When Nixon resigned in 1974 the market was already near the end of a long bear market. The shortest bear market on record caused by the collapse of the Long Term Capital Management and the global debt crisis ended on August 31, 1998 months before Clinton’s impeachment.
 
After October volatility tests support at S&P 2815 or even down to 2725, expect to see a rally into the end of Q4 with a new high near yearend.
 
Pulse of the Market
 
In early September DJIA reclaimed its 50-day moving average after spending the majority of August below it. DJIA once again climbed above 27000 in September (1), but thus far has failed to hold onto this level and advance any further. Seasonal weakness at the end of September (also the end of the third quarter) has materialized as well. As a result of waning momentum and typical seasonal weakness, both the faster and slower moving MACD indicators applied to DJIA have turned negative (2).
 
Dow Jones Industrials & MACD Chart
 
After four straight weekly declines, DJIA (3), S&P 500 (4) and NASDAQ (5) logged three straight weeks of gains until last week. During the rally all three indexes failed to break through final resistance at their respective previous all-time highs. More backing and filling may be in order before any further gains can be made.
 
Market breadth measured by NYSE Weekly Advancers and NYSE Weekly Decliners (6) has been positive for four weeks straight even though major indexes did decline modestly last week. A similar situation transpired at the end of June this year and the market went on to have a mostly solid July with three weekly gains. The biggest difference between then and now is DJIA and S&P 500 did break out to new highs in June before the pause. This time they came up short.
 
Weekly New Highs and Lows (7) continued to exhibit some odd behavior throughout September. A dwindling number of Weekly New Lows is a positive sign, but Weekly New Highs also shrunk throughout September. Some of this could be attributed to a modest retreat in precious metals and other defensive sectors pulling back as interest rates climbed higher. An expanding number of New Weekly Highs combined with stable or declining number of New Weekly Lows is the most bullish combination.
 
It appears that the 30-year Treasury bond yield (8) hit its bottom in late April as it has been climbing since. At that time its was just 0.03 above the 90-day Treasury yield. The last time the 30-year yield was less than the 90-day yield was in early 2007 just before the last economic recession.
 
Click for larger graphic…
Pulse of the Market Table