Seasonal MACD Update: “Octoberphobia” Still in Play Despite Positive October Start
By: Christopher Mistal
October 01, 2020
Following five straight monthly gains, the market finally came under pressure in September. At September’s lows NASDAQ was in correction territory, down over 10%. DJIA and S&P 500 narrowly avoided that threshold. Due to a late-month rally, full-month declines were trimmed significantly. For the month DJIA was down 2.3%, S&P 500 shed 3.9% and NASDAQ declined 5.2%.
[DJIA Daily Bar Chart and MACD “Buy” Indicator Chart]
[S&P 500 Daily Bar Chart and MACD “Buy” Indicator Chart]
[NASDAQ Daily Bar Chart and MACD “Buy” Indicator Chart]
As a result of the end of month rally, our 8-17-19 MACD “Buy” indicators applied to DJIA, S&P 500 and NASDAQ turned positive in September. As of today, our Seasonal MACD Buy Signal is on Hold. 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 satisfied. But do not fear. As we noted in our October Outlook, seasonals are back in style and October’s history of providing ample opportunity is likely on our side.
October’s history of volatility was recapped in the October Almanac as well as it being the worst performing month of election years since 1950. In the following chart we have plotted election-year October performance for DJIA, S&P 500, NASDAQ, Russell 1000 and Russell 2000 since 1950 (NASDAQ since 1972 and Russell indexes since 1980) alongside their historical performance excluding gruesome election-year October 2008.
[Election-Year October Market Performance since 1950 Chart]
With or without October 2008, historical performance has been uninspiring in election years. Excluding 2008, October has generally started off on a positive note, but by around the fourth trading day, strength has tended to fade with weakness persisting until around the eighth trading day. Then a modest rally ensued through mid-month followed by more weakness and finally a rally to end the month. Grey shading highlights the two historical windows of weakness that could setup our Seasonal MACD indicators.
Going one step further, this next chart is still election-year October performance, but broken out by winning party in November’s Presidential Election. Democrat wins are represented by the solid lines and Republican wins are represented by the dashed lines. Democrats were victorious in 1960, 1964, 1976, 1992, 1996, 2008 and 2012. Republicans won in 1952, 1956, 1968, 1972, 1980, 1984, 1988, 2000, 2004 and 2016. Even when split by the winning party, the overall pattern in October is essentially unchanged. Because of 2008, October’s performance prior to a Democrat win in November is worse.
[Election-Year October Market Performance since 1950 by Winning Party in November Chart]
With no clear seasonal advantage no matter how October is sliced and diced, the prudent course of action at this time appears to be remaining patient and await the all clear from our Seasonal MACD Indicator. Aside from seasonal factors, the market is still facing election uncertainty, the possibility of a second covid-19 wave as temperatures cool and people head back indoors, an unknown vaccine timeline and persistently elevated unemployment as many areas of the country are still in partial shutdown status.
Tactical Seasonal Switching Strategy Portfolio Update
In preparation for our upcoming Seasonal MACD Buy Signal, our usual core four ETF positions appear in the portfolio table below. Continue to hold defensive positions in iShares Core US Aggregate Bond (AGG) and Vanguard Total Bond Market (BND). When we issue our Seasonal MACD Buy, we will look to exit AGG and BND and consider establishing positions in DIA, IWM, QQQ and SPY.
[Almanac Investor TSS ETF Portfolio Table]