Seasonal MACD Update: Market Woes Persist, MACD still Negative
By: Christopher Mistal
October 18, 2018
After such a lengthy period of time of relatively consistent market gains accompanied by subdued volatility it’s no wonder why the market’s current action is triggering such a dramatic response. All the talk of 2% and greater market moves seems to suggest this is the first time ever. It is not. October getting off to a rocky start accompanied by a rapid rise in volatility is yet another topic of concern as if this is something new. Again, it is not and we have covered it repeatedly and most recently as our last Alert and in October’s Almanac
However all the talk about October’s turbulent beginning and its historical tendency to be a turnaround or bear killing month does raise the question, what are the market’s chances of turning around and finishing this October with a gain? To answer this question, we went into our database and started at 1950 for DJIA and S&P 500 (NASDAQ since 1971) and retrieved all past occurrences where the market’s performance in October was negative on the thirteenth trading day of the month. This works out to be yesterday’s close. Prior to this year, DJIA had 28 previous losing starts, S&P 500 had 25 and NASDAQ had 21.
DJIA’s worst performance through the thirteenth trading day in October was in 1987 when it plunged 33%. October 1987 was also worst for S&P 500 and NASDAQ. DJIA’s average loss was 3.9%, excluding this year, S&P 500 4.2% and NASDAQ 4.7%. Historically, recovery from these losses by the end of October did not happen that often. DJIA bounced back just 25% of the time to finish October with a gain, S&P 500 recovered just once out of every five (20%) and NASDAQ recovered only 19% of the time. Based upon this data, October 2018 is more likely than not to finish in the red.
[DJIA Performance Following Down October on 13th Trading Day Chart]
[S&P 500 Performance Following Down October on 13th Trading Day Chart]
[NASDAQ Performance Following Down October on 13th Trading Day Chart]
There is potentially some good to come from October weakness. Following November and December performance did generally improve compared to historical averages and frequency of advancing months. The improvement was greatest in December when comparing all Decembers since 1950 to only Decembers following an October that was down on the thirteenth trading day. In all years DJIA’s average gain in December is 1.7% with full-month gains 70.6% of the time compared to a 2.0% average advance and full-month gains 75% of the time. S&P 500 Decembers improve from 1.6% and 75% in all years to 2.4% and 84%. NASDAQ Decembers improve the most jumping from 1.8% and 59.5% to 3.4% and 71.4%. Even if October does finish in the red, there is an above average chance that November and December could be positive.
The current situation also plays right into our Seasonal MACD Buy Signal and the “Best Months.” Valuations are coming down and bullish sentiment is softening while economic data is holding up and corporate earnings are forecast to continue to grow solidly. Recent weakness also improves the probability that this “Sweet Spot” go around could see performance approaching, or even besting, historical averages.
MACD Update
As of today’s close, our Seasonal MACD Buy Signal remains on Hold. Our 8-17-9 MACD “Buy” indicator applied to DJIA, S&P 500 and NASDAQ are all negative (blue arrows in charts below). Currently, single day gains of 841.06 DJIA points, 63.36 S&P 500 points and 72.64 NASDAQ points are needed to turn our MACD indicators positive on all three indexes. In percentage terms, DJIA and S&P 500 would need to gain 3.3% and 2.3% respectively while NASDAQ needs just less than 1% in a day.
[S&P 500 MACD Chart]
As a reminder, the criteria to issue our Seasonal MACD Buy Signal is a new buy signal using our 8-17-9 MACD indicator on or after the first trading day of October and DJIA, S&P 500 and NASDAQ must be in agreement. These criteria are not currently satisfied.