October Outlook: Seasonals Are Back In Style Again
By: Jeffrey A. Hirsch & Christopher Mistal
September 24, 2020
Stock market seasonality has clearly been turned on its head this year. S&P 500 was down -4.1% during the Best Six Months (November-April) from October 31, 2019 to April 30, 2020, while it has been up 11.1% so far during the Worst Six Months (May-October) from April 30, 2020 through the close on September 23, 2020. However, with S&P 500 down -7.5% for September to date it appears seasonals are back in style again. 
The typical end-of-September weakness is priming a constructive set up for our next Best Six & Eight Months Seasonal MACD Buy signal. October is the last month of the Worst Six Months and Worst Four Months. So it is time to begin preparing for our Tactical Seasonal Switching Strategy Best Six/Eight Months MACD Buy Signal. It can come any time on or after October 1. 
When it triggers we will email all subscribers an Alert with instructions on closing out our Bond ETF positons and redeploying into Dow, S&P, NASDAQ and Russell 2000 ETFs. 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. Over the coming weeks we will be presenting a new basket of our top stocks and seasonal ETF sector trades poised to capitalized on our Best Months Strategies. 
Our stock selections will all come through our fundamental screens for reasonably solid valuations, healthy revenue and earnings growth, while exhibiting positive price and volume action as well as other constructive technical and chart pattern indications. The group generally covers a broad array of sectors and industries. It also runs the gamut of market capitalization with a mix of large caps with more than $5 billion in market value, midcaps in the $1-5 billion range, and small caps under $1 billion.
Our annual October ETF buying spree comes from the sector seasonalities in the Stock Trader’s Almanac on pages 92, 94 and 96. Every year while preparing the annual Almanac, we revisit and analyze our seasonal sector trades in depth in order to make adjustments for any new or developing trends. Years of sector research allows us to specify whether the seasonality starts or finishes in the beginning third (B), middle third (M) or last third (E) of the month based upon the number of trading days in the month.
Seasonality Lives
There is no denying that market seasonality has not worked so well this year. But we have been here before and history is on our side. Over the long term, intermediate term and short term market seasonality has suffered brief periods when seasonality was overridden by more powerful forces. The COVID pandemic and economic shutdown certainly qualifies. But it is only a matter of time until repetitive human behavior patterns and people and institutions return to moving money around in the usual daily, weekly, monthly, quarterly and seasonal patterns.
The return of perennial September weakness is emblematic of a return to normal market behavior and a reflection of the fact that despite the continuing concerns about surges in coronavirus cases life is beginning to return to normal. In our area, about 25-30 miles north of New York City, our kids are beginning hybrid learning, playing rugby, lacrosse and other sports (yes with some COVID protocols, but tackling and facing-off), golf outings are happening and people are going to restaurants and out and about.
[INSERT: S&P 500 One-Year Seasonal Pattern Since 1950]
The chart here shows the historical One-Year Pattern of the S&P 500 Since 1950 versus 2020. The black line shows the seasonal pattern since 1950. The blue represents the pattern since 1988. We use 1988 as it is the first year after the 1987 Crash when the market underwent a major systemic change with the implementation of downside protection circuit breakers and collars. It is noteworthy how the seasonal pattern persists during both the 70-year and 31-year timeframes. 
2020 is plotted on the right axis due to the magnitude of the move this year. The yellow box highlights the rebirth of seasonality this September, especially during this notoriously negative Week After Triple Witching Week as detailed page 108 of the 2020 Almanac, indicated by the two black arrows 
Years like 1980, 1982, 2009 and 2016 with unseasonably early weakness and bear markets like 2020 returned to normal seasonal patterns in short order. And years like 1954, 1958, 1980, 1982, 1995 and 2009 that exhibited double-digit gains in the Worst Six Months still proceeded to deliver further sizable gains in the subsequent Best Six Months (page 52, STA 2020). We believe the return of market seasonality is upon us. So remain cautious through the end of September and be alert to Octoberophobia, but remain ready to pounce on our Best Months Seasonal MACD Buy Signal, when it triggers.
Pulse of the Market
September and the third quarter will come to an end in just four trading sessions. Excesses accumulated in July and August are being worked out in rather typical September market trading. Seasonality is not dead after all. September is DJIA’s worst month going back to 1950 and as of the close on September 23, DJIA is down 5.9% this September and 8% off its recovery high. Broad weakness was observed ahead of Rosh Hashanah and around quarterly options expiration. During DJIA’s retreat it closed below its 50-day moving average (1). Next key support is the 200-day moving average which is currently just under 26300. Should this level hold, DJIA will narrowly avoid the 10% decline threshold that is commonly used to define a correction.
Recent weakness has also turned both the faster and slower moving MACD indicators applied to DJIA negative (2). MACD indicators for S&P 500 and NASDAQ are also negative. This pullback appears to be setting up our Seasonal MACD Buy signal nicely. 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
DJIA’s streak of winning first trading days of the week did come to an end in August at thirteen in a row and since then four of the last six Mondays have been losers. Two of the Down Mondays were preceded by Down Fridays triggering the sixth and seventh Down Friday/Down Monday (DF/DM) warnings of 2020 (3). Weakness on Fridays and Mondays has historically signaled waning investor and trader confidence which was frequently followed by further market weakness sometime in the next 90 calendars. Declines were not always immediate and tended to be milder when the Fed was aggressively supporting the economy and market.
Following six straight weeks of gains, S&P 500 (4) and NASDAQ (5) have declined the last three weeks and are currently on track for a fourth week of losses. Technology shares enjoyed the greatest gains on the path higher and have also suffered a larger share of the declines. It will likely be tech that finds support first and leads the broader market higher when uncertainty around the economy and the election begins to fade.
Market breadth measured by NYSE Weekly Advancers and NYSE Weekly Decliners (6) has favored decliners in two of the last three weeks. Breadth was positive last week even as DJIA, S&P 500 and NASDAQ all posted modest weekly losses. This would suggest an attempt at rotating out of mega-cap, index components and into other areas of the market was underway. Considering the appeal (and returns) of mega-cap tech this year, it is likely this rotation will not persist.
Weekly New Highs (7) have also slipped modestly lower in each of the last two weeks while Weekly New Lows have begun to tick higher. This is reasonable within the context of the current market pullback. A bounce in New Highs and/or pause and retreat in New Lows could be an indication the pullback has run its course. A clear indication of this is currently lacking. 
Even after the Fed announced that it expects interest rates to remain low, longer than previously thought, the 30-year Treasury rate has remained relatively stable just above 1.4% for the last five weeks (8). Apparently, bond traders and investors are skeptical the Fed will be successful in achieving its inflation objectives. Low rates are giving the housing market a boost and have historically been beneficial to stocks as well. 
[Pulse of the Market]