October Outlook: Seasonal Weakness Sets Up Q4 Rally
By: Jeffrey A. Hirsch & Christopher Mistal
September 28, 2023
The September surprise we cautioned about last month did materialize. Perhaps not in the form of the credit event we suggested. We may yet have a financial sector surprise when we get into earnings season. While there hasn’t been a banking scare or series of bank downgrades there have been several developments that have conspired with seasonal September weakness to knock the market down over the past month.
Congress is once again spooking stocks with the threat of a government shutdown. Historically, these shutdowns have been short-lived with the market rebounding once it’s clear that the federal government will remain open or reopen fast. Any prolonged closure would likely be a drag on the market. 
Our other major concern has been the 10-year Treasury yield. Persistent inflation and a hawkish Fed have driven the 10-year yield to breakout well above the ~4.3% resistance level we have been concerned about. It has not been at these levels around 4.6% since just before the Grear Financial Crisis in October 2007. Stocks have also been rattled by labor strikes, a weak real estate market and dollar strength.
However, it is uncanny to us how all these market headwinds came to a head on cue during August and September, the worst two months of the year. In early August we noted that Hot Julys are often followed by subsequent declines the create better buying opportunities in autumn. We have been expecting a 5-10% correction to materialize and as it stands now, from their respective summer peaks, DJIA is down -6.2%, S&P 500 -7.4% and NASDAQ -9.9%. 
This is not to say that the correction is definitely over, but it appears that it will end soon. As you can see in our updated pre-election year seasonal charts of S&P 500 and NASDAQ the market continues to track the seasonal patterns quite closely. The 4-Year Presidential Election Cycle also continues to fire on all pistons in the third chart below with the three main indexes following the pattern to a “T” since 2021.
[NASDAQ Pre-Election Year Seasonal Chart]
[S&P Pre-Election Year Seasonal Chart]
[4-Year Cycle]
Down August/Down September
Since 1950 there have been 17 years prior to 2023 when the S&P 500 has been down in both August and September. With one trading day left in September it would appear that 2023 with be the 18th back-to-back down August/down September. In the table here we have include year-to-date performance at the end of September along with performance for the remainder of the year for each month, Q4, and the full year. 
There are some nasty red numbers in there, but we are encouraged by the year’s highlighted in green when the market was up or flat in these years with both August and September in the red. All these years were positive and delivered Q4 turnarounds. In fact. 15 of all 17 years had Q4 rallies with a healthy average gain of 6.58%. This further supports our analysis that the current malaise promises to be short-lived and followed be a typical strong Q4 pre-election year rally.
[Down August & Sept Table]
For now, seasonal patterns and the 4-year cycle are exerting their influence over the market. We all know it doesn’t always happen this way. At some point other forces will take the lead, but for now seasonal and 4-year cycle influences are in the driver’s seat and we will ride these patterns until we observe some significant divergence.
Seasonal MACD Buy Signal Set Up & Parameters
S&P 500 MACD
We are not issuing a signal now. On October 2, the first trading day of the month this year, the window for issuing our Seasonal MACD Buy signal will open. Using our pre-defined MACD parameters for our Seasonal Buy Signal of 8-17-9 we can see in the above charts that MACD has been generally trending lower since June or July with a bounce in late August and September before reversing briskly lower. Generally, the deeper below the zero-line MACD is the more reliable the subsequent crossover signal tends to be. 
As a reminder, the criteria to issue our Seasonal MACD Buy Signal is a new MACD crossover on or after October 2 (first trading day) from DJIA, S&P 500 and NASDAQ and all three indexes must agree. When all criteria have been met, we will send an email Alert.
In addition to our Seasonal Switching Strategy, we will also look to send our Seasonal Sector ETF basket in early October targeting the sectors with the highest frequency and gain magnitude during the upcoming “Best Months” period. We also anticipate putting cash in the stock portfolio back to work with a basket of undervalued and off-the-radar stocks that we believe could deliver above average price appreciation.
Pulse of the Market
Typical August-September seasonal weakness has continued to weigh on DJIA. Recently losses have accelerated and DJIA has closed below its 50-day moving average, its August closing low and its key 200-day moving average (1). Due to recent declines, both the faster and slower MACD indicators applied to DJIA are currently negative and trending lower (2). The further below the horizontal zero line the MACD indicators go, the timelier our Seasonal MACD Buy signal could be. Last year’s October 4, Seasonal Buy proved to be quite effective with DJIA briskly rebounding.
Since the start of August, DJIA has declined in five of the last eight weeks (3), S&P 500 (4) and NASDAQ (5) have been weaker, down six weeks out of eight weeks. This is the seasonal weakness we were concerned about, and it could persist into October as traders seem to appear rather confident in the market due to the continued lack of any Down Monday/Down Friday occurrences since the last two in June.
Market breadth over the last four weeks has been mostly in line with weekly moves. NYSE Weekly Decliners swelled during sizable down weeks, but briefly bucked that trend during the week ending September 15 (6). During that week, DJIA recorded a slim gain, while S&P 500 and NASDAQ logged modest declines. This was also the week before the Fed’s September meeting and stocks mostly just treaded water. Whatever, hopeful expectations that existed ahead of the Fed were, however, quickly squashed by a hawkish Fed affirming rates could still go higher and will most likely remain so for longer.
Weekly New Highs and New Lows were also in line with expectations with minor improvement from the end of August into the first week of September followed by a trend of shrinking New Highs and expanding New Lows (7) when the market resumed declining. A brisk and sustained rebound in Weekly New Highs would be a welcome sign and possibly an early indication that the market’s retreat has or soon will be coming to an end. 
The pace in the rise of the 90-day Treasury rate has slowed to a crawl, but the 30-year Treasury rate is steadily creeping higher (8). The plateauing of short-term rates is largely due to the Fed signaling it is essentially done with rate increases (barring the possibility of an additional 0.25% increase later this year) while the increase in long-term rates is likely tied to persistent and sticky inflation plus a swelling federal debt. However, rates remain reasonable when compared to pre-2008-09 financial crisis levels.
Pulse of the Market Table