Here are a few more field notes from the end of a busy month, with help from analysts at Bespoke Investment Group.

— The single most vivid day of the past year was Aug. 24, when the Dow swooned 1,000 points at its worst. Turns out that the S&P 500 is up 2%, as of yesterday morning, from where it closed that day and up 4% from the closing low the next day.

— Bespoke analysts looked at the way asset managers with futures positions have positioned themselves in S&P 500 E-minis. The analysts discovered that asset managers are at their shortest right before the biggest gains and longest near the biggest declines. Currently, net asset manager positioning is at its shortest (i.e. least long) levels ever, dating back to 2006. Bespoke considers this an “incredibly bullish contrarian signal” that the market has run out of sellers for the time being.ddd

Bespoke quantifies this by looking at deciles of positioning vs. future performance. In the chart above are the ten deciles from the most short to the most long. As you can see, asset managers are currently max short, so they’re in the first of ten percentiles. Future performance has been strong in following periods, ranging from +1.3% in two weeks to +7.4% in three months. It would be a stunner if this turns out to be the case in the current instance. Based on history, the analysts report, it’s unlikely we see significant equity declines from current levels without a small rally or at least a pause for sideways movement.

— When a bull cycle is rolling we often look at short-selling as a contrarian indicator. Not so in a bear phase, as the sellers tend to be right in such stretches. Bespoke did a little study of this phenomenon. They found that the most heavily shorted stocks in the S&P 1500 have been getting mauled this month with an average month-to-date decline of 12.17%. That’s five times worse than the 1.31% decline for the S&P 1500! The top ten are shown below.

— Over the next three weeks, third-quarter earnings season will finally arrive. It’ll be nice to get back to talking about products, services and management. Analysts are preparing for the worst as they trip over each other cutting forecasts. Over the last four weeks, Bespoke reports, analysts have raised EPS forecasts for just 258 companies in the S&P 1500 and lowered EPS forecasts for 623. This works out to a net of -365, or -24% of the stocks in the index. The low reading this year was -32.4% back in early February. Every sector is showing negative revisions. Analysts are currently lowering forecasts at the fastest rate in the energy sector where the net revisions spread is -71% of stocks in the sector, according to Bespoke. That is depressed, but not yet near the lows of -95% in February.

Here’s a measure of how depressed the condition is: Only four stocks in the Dow Industrials are above their 50-day average: Nike, Home Depot, Intel and McDonalds. Five of the 30 stocks are down 25% or more for the year: Caterpillar, Chevron, Dupont, United Technologies and Wal-Mart.

In the much larger S&P 500, just 17% of stocks are over their 50-day averages. This total has been weakening steadily since December, making lower highs in February, April, June and August. That’s another signature of a bear cycle.

Up to now, health care has been one area of the market where people have been able to hide out. But even that group has begun to roll over in a major way, and it could just be getting started. Consider that the group has been lights-out awesome for the past two years, but right now there’s not one stock in the health sector in the S&P 500 trading over its 50-day average! The last time this happened, according to Bespoke, was August 2011.

— And now one final observation, this time about year-end seasonality. You have probably heard over the years that the fourth quarter tends to be the best stretch for stocks. Since the S&P 500 came into existence in 1928, the index has averaged a gain of 2.61% in the fourth quarter of the year with gains 72.4% of the time.

However, the analysts at Bespoke dug deeper into the seasonality numbers and discovered that in years like 2015, when the market is down 5% after three quarters, the index has actually averaged a decline of 0.65% in the fourth quarter with gains just 53.3% of the time.

Conversely, when the S&P is up year-to-date through the first three quarters, it has been almost a guarantee that the index is up in the fourth quarter. In these cases, the average fourth quarter return has been a whopping +4.33%, and the index has been positive 82.5% of the time.

If the market can make up for its 5% loss in the next three days, then expect a strong fourth quarter. If not, batten down the hatches as it could be a very bumpy ride.  But there would still be hope: the most recent example of a negative Q1-Q3, in 2011, actually led to a splendid fourth quarter.

Thanks for reading, and see you again next week.

Best wishes,

Jon Markman