John J. Gardner, CFP®, CPM®

blackhawkwealthadvisors.com

Bi-MONTHLY MARKET ANALYSIS &

ECONOMIC UPDATES

October 12, 2023

Bulls Beat Bears in October

October can be a scary month; at least trick or treaters can look scary. The good news is investors need not be scared by October. Though October has brought fearful times to stock investors historically, it has delivered more good than bad. October is known as the the “Bear killer”, as is been the month that has started more stock market rallies (ended the most bearish markets) than any other month. What has given October a bad name for stocks are extreme market meltdowns such as Crash of 1929 triggering the Great Depression and the Black Monday Crash of 1987. Long before those was The Bank Panic and Stock Market Crash of 1907. All occurred in October. So, what where’s the good from October for the stock market? Again, it has historically been when rallies start.

October Is The Best Month For New Stock Market Rallies.

True stock market rallies are only confirmed by a Follow-Through Day (FTD). A follow-through day is a sign that big institutions are supporting a new stock market rally attempt, suggesting that it stands a good chance of succeeding. As a declining stock market puts in a typical bottoming process, a rally attempt will occur. If it continues for a few days, investors should look for a FTD, starting on day four. That’s when one or more of the major indexes rises at least 1%-1.25% on higher exchange volume than the prior session. Volume doesn’t have to above average, but the stronger price and volume action on a FTD the better. A fact is, not all confirmed stock market rallies succeed, but FTDs are present at every market bottom. Look at October’s record for FTD’s:

As the table above indicates, 35 follow-through days have taken place in October, according to research from 1949-2014. That’s significantly more than any other month, with September’s 19 FTDs among the lowest. Further, October also has the most FTD’s that end up starting “money maker” or “life changing” market rallies. A Money maker rallies are those in which the Nasdaq rises 5.5% or more in the first 20 trading days after a follow through. A life-changing rally goes up at 8% or more in the first 20 days. Here’s a couple of examples…

October 1998 Follow-Through Day

The late 1998 bear market and October FTD is one of the more famous market turns. The Nasdaq peaked at 2028 on July 21, then proceeded to plunge 33.1% to the October 8 low of 1,357 in a violent, double-bottom pattern. At the October low, the Nasdaq was down 19.9% from the end of September. After the October 14 FTD, the Nasdaq immediately had a subsequent FTD that was even more powerful in terms of price and volume. The index surged nearly 21% over the first 20 trading sessions, from the FTD, making it a life-changing rally. The Nasdaq’s historic dot-com run ultimately peaked on March 10, 2000.

More recently was last October.

The 2022 bear market bottomed on October 13 with a big upside reversal. At that day’s low, the Nasdaq was down 4.6% from September, and off nearly 38% from the November 2021 peak.  The chart below is a picture of that severe stock market fall ending with the bottom on October 13, 2022.

The S&P 500 and Nasdaq had FTDs on Oct. 21. But the new rally struggled, especially on the Nasdaq, which approached the October low in early November (see it in the chart movement). Finally on Dec. 28, the Nasdaq marked a new bear market closing low, though shy of an intraday low. A few days later, the market staged a new FTD on January 6, confirming the big rally of 2023 so far.

Not always, but often.

As I said earlier, not all FTD’s lead to new bull markets. But, they often do. And, no bull market has started without one. October is the bear killer. This year October has already delivered a FTD. With the stock market now in a confirmed rally, we will see where it takes us.

Proper Perspective:  In our hectic and often hard to comprehend world, it is very easy to lose perspective. You may agree it is sometimes difficult to see the big picture. The media often doesn’t help with this, but unfortunately instead encourages us to see things in a most negative light. Here is hopefully a pause to gain positive perspective.

~~Barack Obama, 2010

What Happened On This Day, October 12, 1792 – First celebration of Columbus Day in US.

INDICATORS OF INTEREST:

• Market’s Current Signal: Market in Correction.  Analysis of the stock market over 130 years of history shows we can view it in terms of three stages – market in uptrend, uptrend under pressure and market correction. I analogize this to a traffic signal’s changing colors from green to yellow and then to red. Since the 1880’s, this perspective has led to investment out-performance relative to market indexes. This is due to trend analysis which determines risk reducing, return enhancing market entry and exit points. The U.S. stock market’s current trend signal is Market in Correction.

The Stock Market Trend: Market in Correction. The U.S. stock market was trending in a Confirmed Uptrend from May 10 to August 2. A steep, broad and high volume bearish sell-off on that day caused a weaker stock market trend outlook to Uptrend Under Pressure. Continued persistent selling triggered a more bearish signal, knocking the market’s trend into Correction on August 17. A 3-week losing streak came to sudden stop as the resilient market showed strength again, resulting in another trend change back to Confirmed Uptrend Tuesday, August 29. That didn’t last long. On September 7 the stock market’s trend signal weakened to Uptrend Under Pressure. Then multiple days of high volume down days lead to a further weak trend signal on the 20th to Market in Correction.

Here are key market levels as of Monday, October 9:

Recapping Last Week

Rising interest rates kept pressure on U.S. equities, but most indexes staged a bullish turnaround don Friday despite a stronger-than-expected jobs report. The Russell 2000 Index still slumped 2%+ for the week, now more than 12% below its July peak. The Nasdaq Composite gained 1.6% while the S&P500 rose 0.5%. Eight of 11 S&P500 sectors finished lower, with a crude oil selloff knocking energy down 5%. Despite no output policy changes from OPEC, oil prices suffered their worst weekly losses since March, plummeting nearly 9% as demand concerns weighed. U.S. Treasury yields soared, with the 30-year bond eclipsing 5% for the first time since June 2009. The U.S. economy added 336K jobs in September, doubling expectations and highlighting fears that the labor market and economy aren’t cooling enough for the Fed’s liking. The largest job gains were in the lower-paying leisure and hospitality sectors, which kept wage growth in check. Private payroll growth tailed off in September, but job openings rose in August according to the JOLTS report. Oddly, full-time employment is down nearly 700K in the past three months. The door remains open for another rate hike, but rapidly rising yields may be accomplishing some of the Fed’s desired tightening. In other economic news, the U.S. manufacturing industry showed signs of improvement in September, but the ISM PMI reading remained in contraction territory at 49. ISM Services PMI slipped to 53.6 while order backlogs improved. The U.S. trade deficit shrank to a three-year low in August as American demand for foreign goods waned and oil exports jumped.

Trade is projected to be a net positive for Q3 GDP growth.

Internationally, the Bank of Japan said it would conduct additional bond-buying operations to slow a rise in yields. Australia’s Reserve Bank kept rates steady for a fourth consecutive month, but Governor Michele Bullock said additional hikes may still be required. In China, the Caixin PMI surveys revealed increased economic output, while external demand remained sluggish. Britain’s construction activity plunged in September, as higher interest rates led to the largest slump in homebuilding since the 2008-09 recession. Lastly, eurozone producer prices tumbled 11.5% YoY in August, and retail sales declined 1.2% MoM.

Current View

Over the weekend, the conflict that erupted in the Middle East adds additional risks to the global economic outlook, including prospects of new inflationary trends. While this is truly an potential negative for investors and the global financial markets, it is obviously a much greater catastrophic crisis for the people in the midst of the war. The horrific violence has taken thousands of lives.

Today’s hotter-than-expected report on the Consumer Price Index sent the broad stock market down. Both oil and bond yields are up. The big picture is the stock market’s outlook is showing a new confirmed uptrend.  Most market participants are mainly focused on current geo-political risks, earnings report soon to flood in, and the next Fed meeting scheduled for November 1.

• Industry Group Strength:  BULLISH. As of yesterday, 122 out the 197 groups I monitor are up year-to-date. 75 are down.
• New Highs vs. New Lows: BEARISH.  In yesterday’s session, there were 78 new 52-week highs and 147 new 52-week lows.
• Dow Dividend Yield:  BEARISH. The current yield for the Dow Jones Industrial Average is 2.33%. The 10-year Treasury now 4.69%.
• Volatility Index: BEARISH. Volatility has been volatile. The “VIX” is now 16, down from 18 two weeks ago. The index is also known as the “Fear Index.” It is considered a contrarian indicator and therefore viewed as bullish as it rises indicating investors are becoming more fearful. The VIX:

• Fear / Greed Index: Bullish.  Investors are driven by two emotions: fear and greed. Too much fear can create a condition of oversold/ undervalued stock prices. Too much greed can result in overbought/overvalued stock prices. The AAII Investor Sentiment Index is now neutral.   BE FEARFUL WHEN OTHERS ARE GREEDY. At 33, the Fear & Greed Index is up from 25 two weeks ago.

CLICK VIDEO FOR MORE ON THE “FEAR & GREED INDEX”

How CNNMoney’s Fear & Greed Index works

• Bull / Bear Barometer:  NEUTRAL. This secondary market indicator should also be viewed with a contrarian perspective. As of yesterday, according to the latest survey of stock market newsletter writers by Investor’s Intelligence (see below), bullish sentiment is 48.6% and the bears came in at 22.8%. Bulls are up from 43.7% two weeks ago and the bears are down from 24% Consider this a contrarian indicator because the crowd is often wrong at market tops and bottoms. In other words, extreme bullishness has been seen near several market tops in the past, while extreme bearishness has been seen at market bottoms.

• Put / Call Ratio: BEARISH. The ratio of put-to-call options is 0.52, down from 0.75 two weeks ago.  The put-call ratio tracks the mood of what options investors are doing, not just saying. They typically buy puts if they think a stock will decline and calls if they think it will rise. If they’re buying lots of puts, they see the market declining. And if they’re loading up on calls, they’re generally bullish. Historically, market bottoms occurred when the reading spikes to 1.2 or more. Market tops are often made when the reading is 0.6 or less. Note how reliable this is with respect to the February record low coinciding with the market high. Keep in mind this is also a contrarian indicator.

Global Economic Indicators & Analysis:

POSITIVE INDICATORS

Personal Income and Spending: Consumer spending rose a seemingly solid 0.4% in August, but the increase was exaggerated by higher gas prices that are pinching the budgets of the U.S. households. Americans spent more last month on gas, lubricants and other energy-related products after oil prices rose. They also devoted more of their budgets to necessities such as housing, utilities and medical care. The cost of shelter and medical care are on the upswing again. There are growing signs that consumers are feeling the stress of higher interest rates put in place by the Federal Reserve to quench inflation. Home sales have tumbled and it’s more expensive to buy big-ticket items such as cars. Although consumer spending growth remains solid, it will slow in the months ahead as job and wage gains slow and high interest rates and inflation remain drags.

Consumer Sentiment Improves Slightly: Consumer Sentiment improved slightly at the end of September, but Americans were unsure about the future of the economy. The final reading of the sentiment survey rose to 68.1 from 67.7 earlier in the month. The index had touched a nearly two-year high in July before retreating.  Higher gas prices and rising interest rates are pinching households more than they were earlier in the year. The consumer-sentiment survey reveals how consumers feel about their own finances as well as the broader economy.

ISM Manufacturing Shows Signs of Revival: A barometer of business conditions at American factories contracted in September for the 11th month in a row, but there were signs of improvement and many companies even added workers. The Institute for Supply Management’s manufacturing survey rose to 49.0% last month from 47.8% in August. It was the third straight increase and the index matched a 10-month high. Still, the index has been negative for 11 months in a row for the first time since the 2007-2009 Great Recession. Numbers below 50% signal contraction. After a period of malaise, there are signs of stirring in the industrial side of the economy. Heavy industry represents about 10% of gross domestic product. Yet a sustained acceleration in growth is unlikely soon, especially with oil prices rising again and adding upward pressure to inflation.

Construction Spending Rises: Construction spending rose in August, as companies and the government ramped up projects across the U.S. Spending on construction projects rose 0.5% in August to $1.98 trillion, the Commerce Department reported Monday. Construction spending reveals how much the government and private companies spend on projects, from housing to highways. The more the U.S. spends on construction, the higher the level of economic activity. The government revised spending on construction in July to 0.9% from an initial read of a 0.7% increase. Over the past year, construction spending is up 7.4%.

Job Opening Jump: Job openings snapped back in August and rose to 9.6 million, reflecting a robust appetite for labor in light of a steadily growing U.S. economy. The number of job openings is seen as a sign of the health of the labor market and the broader U.S. economy. Job postings have dropped from a record 12 million last year, but they are still well above pre-pandemic levels. Senior Federal Reserve officials had been hoping the labor market would cool considerably by now. They worry a tight labor market — too many jobs and not enough workers — could keep upward pressure on wages and make it harder to tame inflation. The number of people quitting jobs, meanwhile, was basically flat at 3.6 million and totaled less than 4 million for the seventh time in the last eight months. Businesses are not hiring people in droves like they were a year ago, but they aren’t laying many people off, either. Good help is hard to find amid the worst labor shortage since World War II.

Factory Orders Rise: Orders for U.S. manufactured goods rose 1.2% in August, the Commerce Department said yesterday, after declining 2.1% the prior month. Durable-goods orders rose a stronger-than-expected 0.2% in August, according to data released last week, on the strength of increased military spending.

Orders for nondefense capital goods, excluding aircraft, rose 0.7% in August.

US Trade Deficit Shrinks 10%: The U.S. trade deficit shrank by 10% in August to a nearly three-year low of $58.3 billion, reflecting a change in consumer spending habits and possibly some developing weakness in the economy. Whatever the cause, smaller deficits add to gross domestic product, the official scorecard for the U.S. economy. The declining trade gap could give a boost to third-quarter GDP, which is on track to increase by 4% or more. Imports dipped to $314.3 billion in August, the government said Thursday. They are now almost 10% below their record high set a year and a half ago. The deficit is on track in 2023 to be the lowest in four years, but it could be a double-edged sword. Smaller trade gaps boost gross domestic product, the official scorecard of the economy, and can appear to make the economy stronger. Yet part of the decline could also be a sign of softer spending and portend a weaker economy.

Employment Surprise Increase: The U.S. gained 336,000 new jobs in September — much bigger than Wall Street expected — in a sign businesses still have a strong appetite for labor. Hiring in August and July were also revised up. Economists polled by the Wall Street Journal had forecast 170,000 jobs last month. The unemployment rate, meanwhile, was unchanged at 3.8%, the government said last Friday.

Consumer Credit Shrinks: The amount of credit U.S. consumers used in August recorded the biggest decline since the early stages of the pandemic in 2020, likely because people began to pay back college loans. Consumer credit shrank by $15.6 billion in August, Federal Reserve data showed. It was the biggest decline since May 2020. All of the decline was in so-called non-revolving credit such as auto and student loans. Outstanding credit in that category sank by $30.3 billion. Revolving credit, like credit cards, increased at a 14% annual rate in August. Credit-card debt recently topped the $1 trillion mark for the first time ever and delinquencies are rising. Other data suggest households are still in relatively good financial shape, however. more Americans are using credit cards for ordinary expenses — a potential sign of growing financial stress.

Social Security COLA Increases: The cost-of-living adjustment for Social Security will rise 3.2% in 2024, compared with an 8.7% increase in 2023, the Social Security Administration said today. This translates to an average increase of about $60 a month for recipients.

John J. Gardner, CFP®, CPM®.

Blackhawk Wealth Advisors, Inc.

3860 Blackhawk Rd. Ste. 160 Danville, CA. 94506

Phone: 888-985-PLAN · Email: jg@blackhawkwealthadvisors.com

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For my Market Monthly podcast, click on the link below. I provide a review of global stock market highlights over the past month and preview of the month ahead. Forward insights and perspectives are based on current financial market and economic trends with an emphasis on relevant developments in various areas from Fed policy to company earnings announcements.