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Perspective for October Markets

Monday, October 13, 2014

by Sheila & Rich Jamison

The month of October has long engendered a “love, hate” relationship with investors. Some of the more notorious market meltdowns have occurred, or at least escalated, in October. This includes the most notorious ones of 1929, 1987 and 2008. On the other hand, the month is commonly referred to as the “bear killer,” as with its end also comes the beginning of the seasonally strong 6-months of the calendar year.

It’s Not All Bad News

Historically, the month has both started and ended well with the first and last 4 sessions producing gains more times than not. Everything in between has tended to produce a very different experience, with more substantial moves in both directions. So everything’s fine, right?

But Not Necessarily Fun

Even knowing the above, the recent market may have made you feel uncomfortable. There’s good reason. Over the last 16 trading days, the DJIA went through 9 triple-digit (100+ points) peaks and valleys. And not helping with that “comfort” thing, these 9 mini-trends contained 11 triple-digit days. Though this may be ‘natural’ for October, it is also ‘natural’ to feel uncomfortable with it.

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Is DJIA Truly Representative?

Because the DJIA contains only 30 companies, exceptional moves in one or two of those companies can exaggerate changes in the index. To circumvent that coloring our opinion, here’s what the more encompassing S&P 500 (SPX) looked like in past Octobers back to 1950.

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Looking at the average daily returns and the frequency of positive daily returns for each trading day, I would conclude that October is volatile. It’s not just something we see in the DJIA.

Few and Far Between Becomes a Crowd

And, when looking at charts of longer time-frame averages, that volatility may not “feel” quite as bad. It’s the big-dip individual days that feel bad. And when there are a bunch of those days crammed together in time, well, it can get scary. (Do you find it odd that days with big jumps up don’t have that power?)

For Instance

Last Thursday as an example of a day that had this power. On October 9th the S&P 500 fell nearly 41 points, or 2.07%. It was only the fourth time the market dropped by 2% or more in 2014. Thursday was the fourth worst of them. (The worst was the 2.28% loss on February 3rd). It was also only the 14th day of 195 trading days this year the SPX fell by 1% or more. Thursday jumped out even more because days like this have been relatively infrequent over the past couple of years. Admittedly, they have been a bit more frequent over the past month.

Bottom line

I’d bet Thursday “felt” bad to you. (Lest you think I’m singling you out, I will quickly tell you it felt bad to me.)

What Does It Really Mean?

I used the word “perspective” in the title of this Insights edition. So let me offer some on Thursday’s action.

  • The SPX ended Thursday still residing in an overall positive trend (in our lingo, trading above the bullish support line). It was close to, but did not yet reach, a technical sell signal.
  • It had nearby support levels. Violation of these would dictate another look and fresh evaluation. As of Thursday, however, the suggestion was “increased vigilance.”

It is also timely to note that SPX fell further on Friday. It is now roughly 5.4% off its all-time high, and sitting almost exactly on one of those levels I noted above. What this means, from a technical standpoint, is we are now at a crossroads.

Earnings season is just getting under way with many reports coming this week. Alcoa gave it a good start. Monday’s market action will be crucial to our next steps.

More to come as we see circumstances dictate. Stay tuned and in touch.

Sources:
Data from Yahoo Finance and Dorsey Wright Associates.
Daily Equity Report. Staff. Dorseywright.com. October 9, 2014.
The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; BBC News; The Associated Press; Crain’s New York Business; MFS research; NYSE; NASDAQ; Dorsey-Wright Associates; NYMEX.com; CNBC’s Power Lunch & Squawk Box programs; Markit.com; the New York Times; Standardandpoors.com; Djindexes.com; 247wallstreet.com; MarketWatch.com; Morningstar.com; Thomsonreuters.com; the Financial Times.com; Briefing.com; BusinessWeek.com; Dol.gov; Fxstreet.com; Streetinsider.com; Ycharts.com

The data above were taken from sources deemed reliable. However no guarantee can be made as to their completeness and accuracy.
Interpretations of the data, views and/or opinions expressed are those of the Jamison Financial Group based on market and economic conditions as of October 10, 2014 and are subject to change. They do not necessarily reflect the opinions of any other individual, group or organization.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities whenever mentioned are for illustrative purposes only and may not be relied upon as investment advice.
All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index.
The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
The NASDAQ Composite is a market-weighted index of all the over-the-counter common stocks traded on the NASDAQ system.
The S&P 500® is a market-capitalization-weighted index of common stocks.
Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation.
Past performance is no guarantee of future results.

© 2014 Jamison Financial Group. Please feel free to distribute copies to individuals you feel may benefit from the information presented. Commercial use is prohibited.