Market Outlook
Though the S&P 500 index enjoyed the best day in over a
week last Friday, it still posted four consecutive weeks of declines which is
the longest since August 2011. The index is still off 6.2% from its September
18th record high, however the broad index this week steered clear of
correction territory, a 10-percent drop from its high. For the week, the Dow
and S&P were down 1 percent while the Nasdaq was down 0.4 percent. Previous
commentary mentioned “…October is the
last month of the “Worst Six Months” for DJIA and S&P…the Dow Jones
Industrial Average followed through on matching the Russell 2000 index in
negative territory for the year…the other major indexes are moving rapidly
towards being underwater for the year with the S&P 500 index next in line
to go negative…” The S&P 500 index was bailed out from following other
indexes into negative territory by last Friday’s oversold bounce. As you can
observe in the chart below, if the market does not follow thru on the
end-of-week price recovery all the indexes except for the Nasdaq 100 will have
blown their yearly gains.
Investor Analysis
With 81 companies in the S&P 500 already reporting
third-quarter results, 64.2 percent have beaten expectations, a rate slightly
below the average over the past four quarters but better than the past 20 years.
According to the Stock Trader’s Almanac, this year is the seventh worst
DJIA October and fifth worst S&P 500 October since 1950. In 64 years before
2014, DJIA and S&P 500 have both declined 26 times in October. However,
these October declines were followed by 23 DJIA November-December gains
averaging 4.0%. S&P 500 November-December gains have occurred 21 times with
a slightly softer average advance of 3.4%. So despite all of October’s horrors,
the market has historically finished out the year with a rally far more
frequently than not. At the start of the final quarter of the year, the
graph below confirms equities are getting hammered. The best performing stocks
are ‘risk-off’ categories that benefit from low inflation and are considered
‘safe bets’ compared to investments that depend on high economic growth.
The Stock Trader’s Almanac talked about putting the market’s
current trading action into perspective. Earlier this year bullish sentiment
reached levels not seen in years or even decades depending upon data source.
Market volatility had also fallen to levels not seen in years as the market was
steadily making new all-times highs. S&P 500 actually went 63 trading days
without a 1% percent daily move higher or lower. A feat last accomplished in
1995. And it has been more than three years without a 10% or greater S&P
500 correction. This is four times the average duration of time between
corrections. Not to mention the market shrugged off tensions in Ukraine, Ebola
in West Africa, the rise of ISIS in the Middle East, slowing global growth
concerns and the Fed slowly easing up on stimulus. Honestly the market had
gotten ahead of itself and was in need of a cool-off period. More likely than
not, that is what it is doing.
A few weeks ago we discussed the term “Octoberphobia” which
is used to describe the phenomenon of major market drops occurring during the
month. Market calamities can become a self-fulfilling prophecy. Our previous
analysis is valid “…Money managers have
scrambled to reduce big bets in stocks and other risky…Consumer Staples and
Utilities retained their value compared to other sectors over the past month…it
is prudent to avoid energy stocks as this sector continues to be decimated with
no letup in sight. Even short positions on energy stocks would be dangerous at
this point as most of the downside move may have already been gotten…‘holding
cash’ is a viable strategy. Considering current market volatility, maintaining
a high cash position is an excellent move because you can take advantage of
‘buying the dips’ when prices stabilize…”
By Gregory Clay
Investment Strategist
P.S. click on http://www.theoptionplayer.com/ to sign up for a free option trading educational newsletter
No comments:
Post a Comment