OCTOBER: A "SPOOKY" MONTH, BUT ONE HISTORICALLY KNOWN FOR REGISTERING SIGNIFICANT LOWS

 

October is living up to its reputation of being a spooky month. But in the midst of these “scary” times, please realize that the month of October also has a reputation for registering significant Lows. A Low is a function of price only, which ideally develops into a Bottom. In my opinion, equity market Bottoms are a function of both price and time via a Low-Rally-Retest sequence (W-pattern) that occurs over a period of time [week(s)-month(s)].

What Happened? In a word, the market indices themselves are playing catch-up on the downside. The internal correction had been in place for a few weeks and combined with a short-term overbought condition that turned into an external pullback last week (the market indices themselves declined). Yesterday, that internal correction accelerated. The NASDAQ (7422.05) and Russell 2000 (1575.41), downside leaders, closed below their rising 200-DMA support line. The S&P 500 (2785.68) and DJIA (25598.74) are within a “whisker or two” of their 200-DMA support line, currently at 2765 and 25,138 respectively. 

What Am I Following? To discern when market corrections/pullbacks may slow down, stabilize, or end, and with the beginning stage of a “W-pattern” close at hand, I like to analyze price (magnitude and intensity), time (duration) and emotion (sentiment).  

  • Price (magnitude and intensity):  

    • NYSE Down Volume to total NYSE Up and Down volume of 90% or greater = intense selling pressure. Yesterday’s reading was 91.5%. Additionally, NYSE Declining volume beat NYSE Advancing volume by a ratio of 10.7 to 1, also implying intense selling.

    • NYSE Total Volume was very high and far above its 50-day average.

    • Percent of stocks in NYSE, SPX and SML above 50-DMA and 200-DMA are at or close to levels seen in February-March = oversold/almost oversold.

    • The Russell 2000 and the NASDAQ (semis and internet stocks) lead the decline. They may be a helpful guidepost to show when the selling has run its course and a rally attempt begins.  

  • Time (duration): While the Large Cap market indices have only been pulling back for a little over a week, internal readings have been declining for a few weeks, and the RUT has been pulling back for close to six weeks. All to say, as before, Bottoms are a function of price and time as a Low-Rally-Retest sequence (W-pattern) occurs over a period of week(s) to month(s), in my opinion.

  • Emotion (sentiment): The 5-day Total Put/Call ratio closed at 1.12, near the 1.15 level used to discern when optimism is converting to pessimism. Also, the NDR Daily Trading Sentiment Composite has fallen into the extreme pessimism zone. Historically, this has been good for the market. A spike by the Volatility Index, above 20-25+, is also an indication of emotional selling. The VIX closed yesterday at 22.96.

Final Thoughts: I am now watching for the establishment of a Low, which may be close at hand. However, rallies need to be broad and strong, not narrow. Ideally, buying intensity shows up in the form of a Breadth Thrust, the NYSE Up Volume to total NYSE Up and Down volume being 90% or greater, or the NYSE Advancing volume beating NYSE Declining volume by a ratio of 10 to 1. Until this occurs, please be prudent and don’t let your emotions get the better of you!

  • Value possesses mean reversion potential. (Ned Davis Research)

  • Value has tended to outperform during interest-rate market backups, in part because Financials represent the largest sector weighting in the S&P 500 Value Index. That sector has a positive correlation to rates and the curve over the past couple of years. (J.P. Morgan)

Chart Review:

 Value   has tended to outperform during interest-rate market backups, in part because Financials represent the largest sector weighting in the S&P 500 Value Index. That sector has a positive correlation to rates and the curve over the past couple of years. (J.P. Morgan)

Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies. Please let us know if we can do any additional work for you.

UPCOMING EVENTS

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written 10.10.2018. Chart sources: Stockcharts.

PDF Copy of Article: Day Hagan Tech Talk October 11, 2018 (pdf)

Disclosure: The data and analysis contained herein are provided "as is" and without warranty of any kind, either expressed or implied. Day Hagan Asset Management (DHAM), any of its affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Asset Management literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. DHAM accounts that DHAM or its affiliated companies manage, or their respective shareholders, directors, officers and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. DHAM uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. When evaluating the results of prior DHAM recommendations or DHAM performance rankings, one should also consider that DHAM may modify the methods it uses to evaluate investment opportunities from time to time, that model results do not impute or show the compounded adverse effect of transactions costs or management fees or reflect actual investment results, that some model results do not reflect actual historical recommendations, and that investment models are necessarily constructed with the benefit of hindsight. For this and for many other reasons, the performance of DHAM’s past recommendations and model results are not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors.

Investment advisory services offered through Day Hagan Asset Management, an SEC registered investment advisory firm. Accounts held at Raymond James and Associates, Inc. (member NYSE, SIPC). None of the entities listed here in this disclosure are affiliated.