Ghost of October Spooks Market Bears This Time

It’s been a couple months since I’ve last posted anything and today is an attempt to re-establish the discipline of publishing some of my market observations. During this lapse, time has been devoted to trading and developing a new weekly investment research service, Pro Trader’s Brief (“PTB”), for options and swing traders. PTB’s model portfolio has successfully outperformed the market since it’s inception date on August 19th. Enough of that as this post is not a pitch for my newsletter. However, if anyone is curious, simply visit the Services page or Contact page to arrange a free-trial subscription.

Commentary

Where shall I begin? The one thing I really have to say is that today’s market reminds me of one thing, which is that it is October. The month is reknown for its strange happenings and unpredictability and its ghost of the 1987 October Crash has notoriously haunted the market ever since. This appeared to be the case when US equity indices gapped down at the opening and appeared all but certain of initiating another correction after last Friday’s encountered resistance. New 3-day lows have a high probability for continuation patterns but such was not the case today as stocks rallied to recoup most or all of their losses. It was bears who got spooked instead of bulls.

Energy (XLE) and Financials (XLF), two sectors that have lagged the market, were among the first to recover during the intraday rally and distinguish market leadership along with small-caps, e.g. Russell-2K (IWM) and emphatically more with the Russell-2k Value (IWN). Lastly, Gold decoupled from its traditional inverse correlation to the US Dollar and embarked on its own upward path, thus indicating potential inflation and/or perhaps a Biden victory in the US Presidential election on November-3-2020. On the other hand, today’s rebound in equities suggests just the opposite and implies a victory for Trump. Like I said, Octobers can be strange and unpredictable.

Market Summary

Benchmark IndexPriceChange
SP-5003,483.34-5.33 / -0.15%
Nasdaq-10011,898.57-86.79 / -0.72%
DJ-3028,494.20-19.80 / -0.07%
Russell 2K1638.88+17.23 / +1.06%
US Dollar93.78+0.36 / +0.39%
Euro1.17057-0.00397 / -0.34%
Yen0.94840-0.00250 / -0.26%
10 Yr Treasury Rate0.73+0.01 /+1.39%
Gold1,907.79+7.03 / +0.37%
WTI Crude Oil41.02+0.83 / +2.07%
DJ US Real Estate323.48+1.43 / +0.44%

Summary

In summary, I close with the following observations and ask that you let it sink in before reaching any conclusions.

  • Can the US Consumer rise to the occasion and save the economy without confidence and jobs? So here we are with no stimulus and yet the SP-500 trades just -2.92% below its all-time high. The likelihood of stimulus aid will not materialize until after the November-3rd election. Meanwhile, the labor market is enduring this week’s report of 898k new unemployment filings vs forecasts @ 825k. Rising unemployment tends to have a negative impact on consumer confidence, which is not desirable in an economy that derives 70% of its GDP from consumer activity.
  • What has materially changed over the last 7 months? When the market bottomed on Mar-23-2020 from its pandemic induced correction, the total number of US coronavirus cases was 46,445. As of Oct-14-2020, the US has more than 8.15 million cases of Covid19 infections (CDC #s provided by Worldometer). Considering that there is no coordinated national response or consistent application of scientific based risk-mitigation protocols, then the potential outlook becomes even bleaker, despite unprecedented efforts, speed and resources to bring an effective vaccine to market.
  • The 2nd wave could be a tsunami of economic proportions. Europe, once regarded as recovering from the pandemic, is clearly experiencing a 2nd wave and the latest data implies similar approaching the US. Just as the potential severity of the virus was initially downplayed, I fear that politicians are adopting a parallel complacency with respect to the economic repercussions. My rationale leads me to believe this is why Europe has not responded with more aggressive stimulus and why Democrats and Republican lawmakers in the US have failed to agree on aid with the urgency it deserves to avoid the economic tragedy of which Fed Chairman Powell has been forewarning.

Techncial Analysis Chart of the Day

Today had all the makings of a short-term bottom, but we still may not be out of the woods yet. While investors are allocating capital into more value oriented sectors and stocks, it is important to remember that the market capitalization of the technology sector and other leading industries is so disproportionately large that it will be almost impossible to orchestrate this tectonic rotation without earthquake tremors rattling and breaking other pieces within portfolios or funds. It’s going to be a messy business.

Today’s chart illustrates a 2-hour timeframe for the Nasdaq-100 futures contract which, in my last analysis of it, illustrates a bearish or downward sloping channel. Today’s market closed at the upper range of this channel. However, typically in a bearish channel, the upper range acts as resistance while the lower provides support. The Nasdaq-100 futures will need to to decisively break above this resistance level to generate more bullish confidence. Keep your eyes on this one as it should give strong clues on the market direction for tomorrow and the following week.

Click image to enlarge

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