Is Another October Surprise Developing for US Stocks?

On the opening day of trading for the fourth quarter, stocks were beaten down, with all of the major US averages losing more than one percent on the day.

Following Monday's end-of-quarter window dressing session, the losses on Tuesday were unexpected, but not to any extreme extent.

Could the indices be entering an October surprise, not dissimilar to that which occurred in 2018, when the stock markets retreated en masse from all-time highs and then took further flight in December?

It's a real possibility, since, despite making new all-time highs during the summer months, stocks have been relatively flat for the past year. On October 1, 2018, the Dow stood at 26,447.05, which is just 126 points shy of where it closed on Tuesday. Economic conditions haven't really improved. In fact, many might posit that they have degraded.

The World Trade Organization (WTO), which in April 2018 projected global growth at four percent, recently downgraded all of 2019's growth to a paltry 1.2%. Employment, at least in the US, has peaked, with average monthly non-farm payroll data down from last year and September's figures are likely to come in soft.

ISM Manufacturing in the US fell to its lowest level in a decade, registering a 47.8, down from 49.1 points in August and the lowest level since June 2009. Two straight months below 50 indicates not only contraction, but an acceleration in the level of decline. That, in addition to the inverted yield curve, suggests that a recession is due in the US, as Europe is on the brink of recession as well and the condition has a tendency for global contagion.

Thus, stocks get sold, bonds - in a flight to relative safety - get bought and the result is depressed moods all around.

If general chaos is what one desires, this would seem like the perfect opportunity to impeach a sitting president on little more than hearsay. And that is precisely what House Democrats are attempting.

At the Close, Tuesday, October 1, 2019:
Dow Jones Industrial Average: 26,573.04, -343.79 (-1.28%)
NASDAQ: 7,908.68, -90.65 (-1.13%)
S&P 500: 2,940.25, -36.49 (-1.23%)
NYSE Composite: 12,835.35, -169.39 (-1.30%)

Dow's Recent Gains Are Adding Up

With the midterm election turmoil nearly out of the way, stocks have begun the month of November in grand, year-ending fashion, the Dow Jones Industrial Average posting gains in three of the last four sessions, and, extending back into the final days of October, five of the last six were winners.

This string of positives has managed to erase much of the pain that accompanied October, which registered as the worst month of 2018 for stocks. In the past seven sessions, the Dow has advanced nearly 1200 points, an impressive performance, and should continue the path forward since there are few impediments ahead.

The Fed's FOMC meeting this Wednesday and Thursday should prove a non-event, as the committee is almost certain to stand pat on interest rates until the December meeting, when a 25 basis point hike in the federal funds rate is a virtual lock.

The overall outlook is strong for stocks presently, though headwinds could still emerge, October's declines still fresh in the mind, but, sentiment seems to have shifted from selling into rallies to buying on dips once again, and the Dow has regained roughly half of the losses incurred since marking an all-time high on October 3rd.

Other indices have followed suit, though the NASDAQ continues to lag, with many of the tech leaders now laggards, representing, to some, buying opportunities. To others, these tech firms have become no-go zones, appealing only to the most speculative of investing types.

Markets prefer stability, and November appears to offer plenty in the way of complacency and compliant data readings. With holidays straight ahead, it would not be a surprise to stocks exceed their previous highs.

Dow Jones Industrial Average November Scorecard:

Date	Close	Gain/Loss	Cum. G/L
11/1/18	25,380.74	+264.98	+264.98
11/2/18	25,270.83	-109.91	+155.07
11/5/18	25,461.70	+190.87	+345.94
11/6/18	25,635.01	+173.31	+519.25

At the Close, Tuesday, October 6, 2018:
Dow Jones Industrial Average: 25,635.01, +173.31 (+0.68%)
NASDAQ: 7,375.96, +47.11 (+0.64%)
S&P 500: 2,755.45, +17.14 (+0.63%)
NYSE Composite: 12,480.06, +55.75 (+0.45%)

WARNING: Stocks Tumble Again, Key Levels About To Be Tested; Corporate Bag-Holders

As noted in the most recent WEEKEND WRAP, major US indices have been stretched lower to plumb their 200-day moving averages, with the NYSE Composite already having broken well below its 200-day.

While Monday's declines were not extraordinary, they were - with the obvious defection of the NASDAQ - uniform. Lock-step movement of the majors is usually cause for alarm, either to the upside or down, and, in this case, the S&P, Dow and Composite have been displaying the kind of cascading losses indicative that the move is not contained within a few select sectors, but rather, is broadly-based.

US stocks are not the only issues facing lower pricing. Stock indices around the world have been under severe pressure for most of October, extending back into August and September for most of Europe. Emerging markets, suffering losses most of the year - in the case of China, the decline began in 2015 - show no signs of recovering, their slide relentless and often violent.

Overnight, Hong Kong's Hang Send and Japan's NIKKEI indices were battered, the Hang Sent down, 3.06%, the NIKKEI off 2.67%. China's SSE Composite, already a basket case down more than 50% since 2015, fell another 2.26%.

Early on Tuesday, all European stock markets were lower. As has been the case for the past eight weeks, Germany's DAX was leading the way down.

When markets open in the US on Tuesday, the expectation if for further declines, as futures predict a very rough opening. S&P futures were off by as much as 37 points, NASDAQ futures were down more than 125 points, and Dow futures had fallen by more than 400 points by 8:00 am ET.

The immediate key levels for the major indices are obvious ones, as markets close in on the October 11 interim bottoms. The Dow is looking at its close of 25,051.55 on that date. Any intra-day move below that level would likely trigger even more selling pressure, as once again, Dow Theory rears its head, predicating a primary trend change from bullish to bearish.

Confirmation would come from the Transportation Index, which closed on October 11 at 10,397.23 and Monday at 10,435.76. Monday's loss of just three points on the transports was a shallow shadow of what's been an ugly performance since mid-September. Any close below 10,413 would put the index in correction territory, which was not reported on the October 11 flush.

As the S&P approaches its October 11 low of 2728.37, it is still three to four percentage points above correction (-10%), but the index has been hammered down of late with lower closing prices in 11 of the last 13 trading sessions.

The aforementioned NYSE Composite needs a close of 12,273 to qualify for correction mode. Its high dates all the way back to January 26, when it closed at an all-time high of 13,637.02. The composite is down more than nine percent from the highs and is down 3.6% year-to-date.

NASDAQ watchers will be eyeing the level of 7329.06, the October 11 closing low, after the index reached an all-time high of 8109.54 on August 31. A close of 7298 would be a 10% decline from that level.

Since October is traditionally the most volatile month, companies and investors will be seeking scapegoats and already some corporate types have singled out the threat or imposition of tariffs by President Trump as the primary cause for poor third quarter results.

Some analysts have touted the recent selloff as technical in nature, without important underlying rationale. Taking the case further afield, a recent note by JP Morgan analysts infers that the selling is not only technical in nature, but driven by the lack of corporate stock buybacks, typically halted or blacked out during earnings seasons.

The MarketWatch article which references the analysis is fascinating and full of charts and figures comparing the October breakdown to February's quickly-accelerating descent.

What the analysts fail to point out in their notes is that stocks rose dramatically during second quarter earnings season, from the end of June to near the end of July, putting the lie to their thesis. Stock buybacks have been the main driver of stocks since the aftermath of the 2008-09 crash, and are poised this year to reach a record above $900 billion.

At least, when stocks rebound near the end of the month (as the analysis suggests), we can finally proclaim to know just who those infamous buy the dip punters have been. If indications of a bear market continue to emerge, America's finest corporations, led by the best and brightest managers, will be the ultimate bag-holders, repurchasing their own stock at grossly elevated prices.

Only in America...

Dow Jones Industrial Average October Scorecard:

Date	Close	Gain/Loss	Cum. G/L
10/1/18	26,651.21	+192.90	+192.90
10/2/18	26,773.94	+122.73	+315.63
10/3/18	26,828.39	+54.45	+370.08
10/4/18	26,627.48	-200.91	+169.17
10/5/18	26,447.05	-180.43	-11.26
10/8/18	26,486.78	+39.73	+28.47
10/9/18	26,430.57	-56.21	-27.74
10/10/18	25,598.74	-831.83	-859.57
10/11/18	25,052.83	-545.91	-1,405.48
10/12/18	25,339.99	+287.16	-1,118.32
10/15/18	25,250.55	-89.44	-1,207.76
10/16/18	25,798.42	+547.87	-659.89
10/17/18	25,706.68	-91.74	-751.63
10/18/18	25,379.45	-327.23	-1,078.86
10/19/18	25,444.34	+64.89	-1,013.97
10/22/18	25,317.41	-126.93	-1,140.90

At the Close, Monday, October 22, 2018:
Dow Jones Industrial Average: 25,317.41, -126.93 (-0.50%)
NASDAQ: 7,468.63, +19.60 (+0.26%)
S&P 500: 2,755.88: -11.90 (-0.43%)
NYSE Composite: 12,374.76, -82.51 (-0.66%)