Market Summary
It has already been reported how investors experienced the
first 10% correction in the major stock indexes since 2011 as worries of an
economic slowdown in China and angst over interest rate policy and when the
Federal Reserve will hike rates has taken a toll. Add to those concerns, a
meltdown in the commodities markets and growing fears that stocks have climbed
to unsustainable valuations, and the net result is a high volatility market.
Those worries have sparked a big selloff that has knocked more than half of the
stocks in the S&P 500 down more than 20%, which puts those stocks in bear
market territory. Investors sought bargains among beaten-down stocks and the
recently battered biotechnology index bounced back on the last day of Wall Street's
worst quarter since 2011. For much of the third quarter, global markets were
rocked by fears of slowing growth in China and uncertainty over timing for a
U.S. Federal Reserve hike of interest rates. Biotech had a seven-day selloff
kicked off by drug price regulation worries. For the quarter, the Dow fell
7.6%, the S&P lost 6.9% and Nasdaq fell 7.4%. For September, the Dow fell
1.5% while the S&P dropped 2.6% and Nasdaq fell 3.3%. For the week, the Dow
and S&P gained 1% while the Nasdaq ended basically flat gaining .5%.
A standard chart that we use to help confirm the overall market trend is the Momentum Factor ETF (MTUM) chart. Momentum Factor ETF is an investment that seeks to track the investment results of an index composed of U.S. large- and mid-capitalization stocks exhibiting relatively higher price momentum. This type of momentum fund is considered a reliable proxy for the general stock market trend. We prefer to use the Heikin-Ashi format to display the Momentum Factor ETF. Heikin-Ashi candlestick charts are designed to filter out volatility in an effort to better capture the true trend. We note in the updated MTUM chart below how stocks are bouncing off support. Also noted is downward momentum is dissipating and trying to turn higher while strength indicators are signaling an oversold bounce.
Investment Analysis
No one knows for sure where the S&P is heading, but as
the markets move into the best 6 months for stocks in November, a lot of market
watchers are going with the yearend statistics that say the markets will move
back up at year end. There have been way too many times that stocks sold off in
September and October, and followed with a sharp rally. Some analyst refer to
October as the “spooky” month, and while there are some historical declines in
October, it also known as the “bear killer”. More bottoms are made in October
than any other month, and while it has a negative stigma, the month overall is
solidly bullish on the historical calendar. Furthermore, the final quarter of
the year is historically the best performing period.
According the Stock Traders’ Almanac, October’s typical
performance appears in the above chart over the recent 21-year span 1994 to
2014. On average, early month weakness has proven to be an excellent buying
opportunity, especially for NASDAQ (purple line) as early losses were quickly
recouped leading to an average gain of over 3% from early month lows to the
close. In the last couple of years, after September 19th, the S&P traded
lower into month’s end and made a bottom sometime in the early part of October,
and in turn rallied into years end. That’s exactly what we could see this year
as fund managers have seen their year-end bonus disappear with the selloff.
They got too short after the initial low was made, and now need to markup
stocks with a yearend rally to restore their positive performance.
By Gregory Clay
Investment Strategist
Click here to
gregoryclay@theoptionplayer.com
P.S. click on http://www.theoptionplayer.com/
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