OCTOBER CROSS CURRENTS
In the August newsletter, we introduced a new indicator. We said that if the S&P 500 closed in the bottom 20% of the range for a particular month, that the market should be higher over the next two months.
This situation happened at the end of August and we suggested that the market would be higher at the end of October.
Since that signal, the S&P 500 is up over 9%. This means that October could actually fall back by less and the signal would still be correct. However, most of the signals do give us two months on the upside and in the chart shown below, the second month has been up in 8 of 11 previous instances.
Also, in the chart below, the total profits from the signals shown have been 424 S&P 500 points while the S&P 500 itself was up only 30 points.
In spite of this tendency, this is October and there have been some pretty sharp declines in this month over the years and we shouldn’t be too surprised if it happens again.
For instance, in 2009, the S&P 500 dropped 4.7% at one point in the month of October. In 2008, it lost 20%. In 2007, 4%. In 2006, there was no appreciable loss, but in ‘05 and ’04 the S&P 500 lost 4% and 3% respectively. In 2004 and 2003, there was no significant loss, but September had sharp drops. So in this time frame, we have seen a number of reactions.
However, there is a silver lining. Except for 2008, these declines were excellent buying opportunities so if we do get a substantial loss this month, it may well present some profit potential.
Before the end of August, we took note that a number of analysts on CNBC were telling us that September was a poor month from a historical standpoint. This was in spite of the fact that 5 of the last 6 have been higher. It was against the backdrop of a very poor August. So now, with the best September since 1939, behind us, no one is warning us about the potential ravages of October.
We’ll see if this anecdotal evidence has any relevance.
We continue to be impressed by the strong internals. Look at the chart below. Note that on the S&P 500, point B is considerably below point A. However, on the advance decline line directly below, point B is higher than point A.
In other words, the A-D line has already made up the loss from late April while the S&P 500 and
most other indices still have a considerable distance to go.
The advance decline line frequently gives you clues about market strength. Note in the middle of the charts that the down slant of the lows for the S&P is much steeper that the lows for the A-D line (arrows).
This is one reason that near term drops aside, we look for higher prices into the end of the year, perhaps considerably higher.
Adding to the bullish evidence was the action in September. According to a study shown on CNBC, since 1950, if September is higher, there is a 74% chance that the fourth quarter will also be higher. We haven’t checked this assertion, but it seems reasonable. We suspect that it is correct.
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A Short Biography
Since 1984, the editor and publisher of the Todd Market Forecast, a monthly newsletter with emphasis on the stock market, but also with sections about gold, oil, currencies and bonds.
Steve spent a number of years as an engineer in a steel mill before becoming a stock broker with a number of Firms, including E.F. Hutton, Bache and Paine Webber.
He has published articles on the economy and the stock market in the following publications: Barron’s, Stock Market Magazine, Futures Magazine, The National Educator and others.
His stock market commentary is heard on CNBC, Bloomberg, Associated Press Radio, Business Radio Network, CKNW in Vancouver, British Columbia, KFWB, Los Angeles and ROBTV in Toronto, Ontario.