October Outlook: Will Sweet September Gains Lead to October Pains? By: Jeffrey A. Hirsch & Christopher Mistal | September 26, 2024 | Email | Print

Probably not. All the recent market action is bullish. Economic readings and corporate results continue to point to a soft landing. There are still weak spots and areas of concern, but for the most part the Fed’s 50 basis point cut, which was more than we expected, is likely a tailwind for stocks. It’s hard to fathom that lowering rates in the face of solid economic growth and a raging bull market is a negative for stocks.

 

However, should the Fed continue to cut aggressively at the next two meetings that would be a concern. Harken back to our July 11 issue where we laid out the case that “Modest Rate Cuts [are] Best” for the market. “Years in which Fed Funds Rate was cut by 2% or more, were a disaster on average.”

 

The evidence continues to mount that this bull market has legs. So, while October is notorious for declines and crashes and is historically weaker in election years, it doesn’t appear that the economy or the market are in any imminent danger now. We do not expect any sizable pullback between now and yearend. There will likely be some of the usual October volatility that results in a pullback of a few percentage points in the single digits. 

 

There is also plenty of uncertainty surrounding this election. We hear chatter about transfer of power concerns and fears of a 2000 repeat or something more significant than Jan 6. Investors may be reluctant to commit capital until after Election Day. As we detail in the 2024 Election Year Edition Almanac, it matters less who wins, the market just wants to get past the election with a clear decision. 

 

We are also hearing talk of what happens when one party controls both chambers of Congress and the presidency. A Republican Congress and Democratic President has been best for the market. Here are all the scenarios from the page in the soon to be released 2025:

 

 

Unless something changes on the world stage and things escalate dramatically in the Mideast, Ukraine, Pacific rim or some new hotspot bubbles up or there is some unexpected systemic failure, the most likely scenario is for a mild pause in October, some sideways action and a fractional gain for the month with some unnerving chop in the middle before the bull market takes off again to new highs after the election.

 

There has also been some conversation about the market making a new all-time-high (ATH) in September, the worst month of the year, especially in an election year. We have taken a different look at it considering the giant gains so far this year. Here’s what we found:

 

 

The history of years with gains of this magnitude at this juncture in the year and September’s upside performance for the most part have been followed by more bullish market behavior and a continuation of the rally. But as you can see in the table the bulk of any damage occurred in October (cue “Spooky” by the Atlanta Rhythm Section).

 

 

 

We are not issuing a signal now. On October 1, the first trading day of the month this year, the window for issuing our Seasonal MACD Buy signal will open. Our pre-defined MACD parameters for our Seasonal Buy Signal are 8-17-9. Generally, the deeper below the zero-line MACD is the more reliable the subsequent crossover signal tends to be. 

 

The criteria to issue our Seasonal MACD Buy Signal is:

 

1. A new buy signal crossover using our 8-17-9 MACD indicator AND

2. The crossover must occur on or after the first trading day of October AND

3. DJIA, S&P 500 and NASDAQ MACD indicators must all agree.

 

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 (or two) of undervalued and off-the-radar stocks that we believe could deliver above average price appreciation.

 

Over the past few days, the faster MACD Buy indicator has been showing a loss of positive momentum. Should this trend hold, the MACD Buy indicator could turn negative just as the calendar flips to October. A mild consolidation of recent gains could potentially setup our Seasonal MACD Buy signal for a better entry point on or after October 1.

 

 

Assisted by an 0.5% Fed rate cut, and the expectations for more, DJIA (1) and S&P 500 have broken out to new all-time highs. But the path higher has not been without some volatility as typical post Labor Day selling pressures pushed DJIA nearly 3% lower during the first week of trading in September. From DJIA’s closing September 6 low through yesterday’s (September 25) close, DJIA has pushed 3.9% higher and was up 0.8% for September. These gains have DJIA bucking September’s historical tendency of mild average losses.

 

Early September weakness was sufficient to turn both the faster and slower moving MACD indicators tracking DJIA negative. However, DJIA’s subsequent rebound quickly reversed the negative signals and both MACD indicators are now positive (2). At the start of trading today, September 26, DJIA’s faster MACD Buy indicator was showing a loss of positive momentum. Should this trend hold, the MACD Buy indicator could turn negative just as the calendar flips to October. A mild consolidation of recent gains could potentially setup our Seasonal MACD Buy signal for a better entry point on or after October 1.

 

 

Over the last six weeks DJIA (3) and S&P 500 (4) have both recorded a weekly gain five times. NASDAQ (5) has been slightly weaker with one additional weekly loss. Volatility during the period was elevated with three of the six weeks experiencing moves in excess of 2.5% by DJIA, nearly 4% or more by S&P 500 and over 5% by NASDAQ. Market volatility is not likely to recede until after Election Day and even then, geopolitical concerns could still keep the market on edge.

 

Weekly market breadth data has generally been consistent with the market’s weekly ups and downs over the last five weeks (6). NYSE Weekly Advancers outnumbered Weekly Decliners in positive weeks while Weekly Decliners were the majority during negative weeks. The notable exception was the last week in August when market breadth was positive, but NASDAQ declined. The following week was a broad disaster. Should a similar week unfold, it could be any early warning sign of potential upcoming weakness.

 

With DJIA and S&P 500 trading in new all-time territory, Weekly New Highs (7) have expanded to the greatest number since early May 2021. Resilient technology has contributed while rate sensitive stocks appear to be joining the New Highs list. Positively, the jump in New Highs was also accompanied by a sharp retreat in New Lows. Last week’s 27 New Lows was the fewest number since the final week of trading in 2023. Clearly bullish trends, but until NASDAQ can break out, these trends could be at risk.  

 

90-day and 30-year Treasury yields continued to trend lower over the past five weeks (8). The 90-day Treasury had the largest decline as the Fed cut in September as expected. The 30-year yield saw less of an immediate impact but is still lower. Lower interest rates could give consumers some much needed relief as the holiday shopping season nears.