3 Things: Market, Trade, Volatility

Strong October Leads To…

Following the sharp August and September correction, the markets have advanced roughly 17% in less than three months. Which is pretty incredible considering that the Fed is discussing tightening monetary policy while the rest of the world loosens it amid fears of a global slowdown. 

I have discussed over the last couple of weeks the entrance of the markets into the seasonally strong time of the year, to wit:

“”The table below shows the statistics of the seasonally strong/weak periods of the S&P 500 from 1957 to present using the data from the Federal Reserve (FRED).

As noted above, there is a statistical probability that the markets will potentially try and trade higher over the next couple of months particularly as portfolio managers try and make up lost ground from the summer.

However, it is important to note that not ALL seasonally strong periods have been positive. Therefore, while it is more probable that markets could trade higher in the few months ahead, there is also a not-so-insignificant possibility of a continued correction phase.

Furthermore, the probability of a continued correction is increased by factors not normally found in more “bullishly biased” markets:

• Weakness in revenue and profit margins
• Deteriorating economic data
• Deflationary pressures
• Increased bearish sentiment
• Declining levels of margin debt
• Contraction in P/E’s (5-year CAPE)

(For visual aids on these points read: 4 Warnings)

It is the highlighted lines above that are most important to today’s discussion. 

Adam Shell via USA Today had a good piece of analysis supporting the possibility of a weaker end-of-year run in the markets. 

“Although November has been the Dow Jones industrial average’s second-best performing month the past 20 years (gaining an average 2.4% and finishing up 70% of the time), the market has posted slightly negative returns (-0.12%) in November after the S&P 500 gains 5% or more in October, Bespoke Investment Group data since 1928 show.

The most recent example of the stock market pausing in November after a big October rally occurred four years ago. After the S&P 500 rallied nearly 11% in October 2011, stocks fell 0.51% that November and were up just 0.34% in the final two months of 2011. Ironically, many Wall Street pros have been saying that this year’s market performance is tracking very closely to the ups and downs of the market back in 2011, when the S&P 500 finished the year virtually unchanged.

The takeaway: Don’t expect the year-end rally to be quite as robust following last month’s huge run-up.”