October 2019 Trading & Investment Strategy
September 26, 2019
Market at a Glance - 9/26/2019
By: Christopher Mistal
September 26, 2019
9/26/2019: Dow 26891.12 | S&P 2977.62 | NASDAQ 8030.66 | Russell 2K 1533.33 | NYSE 13028.74 | Value Line Arith 6198.29
Psychological: Frothy. According to Investor’s Intelligence Advisors Sentiment survey, bulls are at 55.1%. Correction advisors are now at 28.1% and Bearish advisors are just 16.8%. The improvement in sentiment has tracked the market’s rebound and is now near levels where caution should be considered. Bulls were only slightly higher at the end of July just before the market retreated. 
Fundamental: Soft. Q2 U.S. GDP came in at 2% and the Atlanta Fed GDPNow model is currently forecasting 1.9% growth in the third quarter. This confirms growth is slowing. Trade tensions remain creating further uncertainty among businesses. Employment metrics remain reasonably solid which is supporting consumer confidence.
Technical: Testing Support? September’s rally did push DJIA, S&P 500 and NASDAQ back above their respective 50-day moving averages but failed to produce new highs. NASDAQ has already slipped back below its 50-day moving average while DJIA and S&P 500 are just holding above theirs. NASDAQ could be headed toward a test of its August lows. DJIA and S&P 500 could follow if they break their respective 50-day moving averages.
Monetary: 1.75-2.00%. Just as expected the Fed cut rates by 0.25% at its September meeting. Barring a significant degradation in economic data, the Fed could be done with cuts in 2019. According to the CME Groups FedWatch Tool there is just a 47% chance of a cut in October and a 67.4% cut in December which is far from certain in either month.
Seasonal: Improving. October is the last month of the “Worst Months” for DJIA, S&P 500 and NASDAQ. Our Seasonal MACD Buy Signal can occur as soon as October 1. However, in pre-election years since 1951, October is the second worst month of the year.
October Outlook: Octoberphobia Sets Up Seasonal Buy
By: Jeffrey A. Hirsch & Christopher Mistal
September 26, 2019
Amid all the news and noise U.S. financial markets continue to track the seasonal and 4-year election cycle patterns closely as they has all year long. Our strategy that employs and utilizes seasonality is outperforming the market. Our defensive positions in Bonds, Utilities, Staples, Healthcare and high-yield stocks that we have been deploying since spring are still beating the market.
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.
We will also be considering getting back into sectors that begin a bullish period in October such as Financials, Consumer Discretionary, Tech, Industrials, Materials, Transports as well as hand-selecting with our proprietary stock screen a new basket of fast-growing, undervalued stocks under Wall Street’s radar. Right now we are not buying anything new. We are in our seasonal holding pattern until the market shows positive momentum after October 1.
Amazingly, 2019 market price action continues to track the historical trend and pattern as you can see in the updated chart of Pre-Election Year Seasonal Patterns overlaid with 2019. On cue stocks paused at resistance below the highs in the third week of September and appear to be turning lower. This suggests 2019 will continue to move in synch with the seasonal moves depicted on the chart. So we expect support to be tested in the volatile month of October, which is the 2nd worst month in Pre-Election Years.
[Pre-Election Year Seasonal Patterns CHART]
The negative news flow from election campaigning, impeachment proceedings, trade wars and Mideast hostilities is likely to feed into what can become the self-fulfilling prophecy of Octoberphobia so it will be important to keep our emotions in check and stick to our system and wait for our buy signal. 
Unfortunately, history provides little guidance on presidential impeachment proceedings. Andrew Johnson (1868) and Bill Clinton (1998) were the only two presidents ever impeached and both were acquitted in the Senate trial. Richard Nixon (1974) resigned before his likely impeachment. These were the only three presidents to ever be the subject of formal impeachment charges. 
We have little market data from 1868, but after Johnson’s acquittal he failed to gain the nomination at the 1868 Democratic National Convention to run for president for another term. A stock market panic and recession ensued in 1869 as the country struggled through the Reconstruction. When Nixon resigned in 1974 the market was already near the end of a long bear market. The shortest bear market on record caused by the collapse of the Long Term Capital Management and the global debt crisis ended on August 31, 1998 months before Clinton’s impeachment.
After October volatility tests support at S&P 2815 or even down to 2725, expect to see a rally into the end of Q4 with a new high near yearend.
Pulse of the Market
In early September DJIA reclaimed its 50-day moving average after spending the majority of August below it. DJIA once again climbed above 27000 in September (1), but thus far has failed to hold onto this level and advance any further. Seasonal weakness at the end of September (also the end of the third quarter) has materialized as well. As a result of waning momentum and typical seasonal weakness, both the faster and slower moving MACD indicators applied to DJIA have turned negative (2).
Dow Jones Industrials & MACD Chart
After four straight weekly declines, DJIA (3), S&P 500 (4) and NASDAQ (5) logged three straight weeks of gains until last week. During the rally all three indexes failed to break through final resistance at their respective previous all-time highs. More backing and filling may be in order before any further gains can be made.
Market breadth measured by NYSE Weekly Advancers and NYSE Weekly Decliners (6) has been positive for four weeks straight even though major indexes did decline modestly last week. A similar situation transpired at the end of June this year and the market went on to have a mostly solid July with three weekly gains. The biggest difference between then and now is DJIA and S&P 500 did break out to new highs in June before the pause. This time they came up short.
Weekly New Highs and Lows (7) continued to exhibit some odd behavior throughout September. A dwindling number of Weekly New Lows is a positive sign, but Weekly New Highs also shrunk throughout September. Some of this could be attributed to a modest retreat in precious metals and other defensive sectors pulling back as interest rates climbed higher. An expanding number of New Weekly Highs combined with stable or declining number of New Weekly Lows is the most bullish combination.
It appears that the 30-year Treasury bond yield (8) hit its bottom in late April as it has been climbing since. At that time its was just 0.03 above the 90-day Treasury yield. The last time the 30-year yield was less than the 90-day yield was in early 2007 just before the last economic recession.
Click for larger graphic…
Pulse of the Market Table
October Almanac: Second Worst Month in Pre-Election Years
By: Christopher Mistal & Jeffrey A. Hirsch
September 19, 2019
October often evokes fear on Wall Street as memories are stirred of crashes in 1929, 1987, the 554-point drop on October 27, 1997, back-to-back massacres in 1978 and 1979, Friday the 13th in 1989 and the 733-point drop on October 15, 2008. During the week ending October 10, 2008, Dow lost 1,874.19 points (18.2%), the worst weekly decline in our database going back to 1901, in point and percentage terms. The term “Octoberphobia” has been used to describe the phenomenon of major market drops occurring during the month. Market calamities can become a self-fulfilling prophecy, so stay on the lookout and don’t get whipsawed if it happens.
But October has become a turnaround month—a “bear killer” if you will. Twelve post-WWII bear markets have ended in October: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002 and 2011 (S&P 500 declined 19.4%). However, eight were midterm bottoms. Over the last 21 years, October’s performance has been solid. Average gains in over the last 21-years range from 1.6% by Russell 1000 to 2.5% by NASDAQ. Small-caps have still struggled though with Russell 2000 gaining a modest 0.6%
[Pre-Election Year October Performance Table]
Pre-election year Octobers are ranked second from last for DJIA, S&P 500 and NASDAQ while Russell 2000 is dead last with an average loss of 1.9%. Eliminating gruesome 1987 from the calculation provides only a moderate amount of relief. Should a meaningful decline materialize in October it is likely to be an excellent buying opportunity, especially for depressed technology and small-cap shares.
Options expiration week in October provides plenty of opportunity. On the Monday before expiration the DJIA has only been down eight times since 1980 and the Russell 2000 is up twenty-two of the last twenty-nine years, seventeen straight from 1990 to 2006. Expiration day has a spotty record as does the week as a whole. After a market bottom in October, the week after is most bullish, otherwise it is susceptible to downdrafts.
October is also the end of the Dow and S&P 500 “Worst 6 Months” and NASDAQ “Worst 4 Months”. Remain attentive for our Seasonal Buy Signal that can occur anytime beginning October 1. An email Alert will be sent when it triggers.
October (1950-2018)
  DJI SP500 NASDAQ Russell 1K Russell 2K
Rank 7 7 9 7 12
# Up 41 41 26 25 22
# Down 28 28 22 15 18
Average % 0.6   0.8   0.6   0.8   -0.5
4-Year Presidential Election Cycle Performance by %
Post-Election 0.9   1.0   1.4   0.9   0.3
Mid-Term 2.6 2.7 3.1 3.5 2.4
Pre-Election -0.5 0.1 0.05 0.2 -1.9
Election -0.8 -0.7 -2.1 -1.5 -2.8
Best & Worst October by %
Best 1982 10.7 1974 16.3 1974 17.2 1982 11.3 2011 15.0
Worst 1987 -23.2 1987 -21.8 1987 -27.2 1987 -21.9 1987 -30.8
October Weeks by %
Best 10/11/74 12.6 10/11/74 14.1 10/31/08 10.9 10/31/08 10.8 10/31/08 14.1
Worst 10/10/08 -18.2 10/10/08 -18.2 10/23/87 -19.2 10/10/08 -18.2 10/23/87 -20.4
October Days by %
Best 10/13/08 11.1 10/13/08 11.6 10/13/08 11.8 10/13/08 11.7 10/13/08 9.3
Worst 10/19/87 -22.6 10/19/87 -20.5 10/19/87 -11.4 10/19/87 -19.0 10/19/87 -12.5
First Trading Day of Expiration Week: 1990-2018
#Up-#Down   22-7   20-9   19-10   21-8   22-7
Streak   D1   D1   D1   D1   U2
Avg %   0.6   0.5   0.6   0.6   0.5
Options Expiration Day: 1990-2018
#Up-#Down   15-14   18-11   19-10   18-11   13-16
Streak   U2   D1   D1   D1   D1
Avg %   0.04   0.02   0.02   0.02   -0.08
Options Expiration Week: 1990-2018
#Up-#Down   21-8   21-8   16-13   20-9   16-13
Streak   U4   U4   D1   D1   D1
Avg %   0.8   0.8   1.0   0.8   0.6
Week After Options Expiration: 1990-2018
#Up-#Down   18-11   15-14   16-13   15-14   14-15
Streak   D1   D1   D1   D1   D3
Avg %   0.3   0.1   0.2   0.06   -0.09
October 2019 Bullish Days: Data 1998-2018
  3, 4, 14, 16 3, 14, 16-18, 21 3, 14, 16, 23, 31 3, 14, 16-18, 21 18, 31
  28, 30 23, 24, 30, 31   23, 30, 31  
October 2019 Bearish Days: Data 1998-2018
  7, 11, 25 7, 11, 25 None 7, 11, 25 7, 8, 10, 25
October 2019 Strategy Calendar
By: Christopher Mistal
September 19, 2019
Stock Portfolio Update: Worst Months Not Over Yet
By: Christopher Mistal
September 12, 2019
In our September Outlook we noted the market would likely work its way higher in the first few weeks of September. The pace has been quick with S&P 500 breaking through resistance around 2950 and then again right around 3000, but momentum appears to be fading short of previous all-time highs. A meaningful improvement in trade and/or a 0.50 interest rate cut by the Fed next week is likely needed to provide the boost the market needs to breakout to new highs. There has been some improvement to the trade outlook, but the odds of 0.50 rate cut from the Fed are nearly zero. In fact, as of today the CME Group’s FedWatch Tool is showing just an 88.8% chance of a quarter point cut.
Next week when the Fed meets is also quarterly options expiration. Overall next week does have a bullish record with S&P 500 recording an average gain of 0.28% during the week since 1990 with twenty weekly advances in twenty-nine years. But the week after and the end of the third quarter have the exact opposite record, actually even worse. Since 1990, S&P 500 has fallen twenty-three times during the week after options expiration and the average loss has been a sizable 0.95%.
The market is likely to make a run at new highs, it just may not spend much time there before retreating again. We will continue to maintain a defensive posture until our Seasonal MACD Buy Signal triggers sometime on or after October 1.
Stock Portfolio Updates
In the time since last update through yesterday’s close the Almanac Investor Stock Portfolio climbed 1.7% higher compared to a 4.1% gain by S&P 500 and a 5.0% gain from the Russell 2000. A sizable cash balance buffered the portfolio’s return. The portfolio also declined less in August compared to S&P 500 or Russell 2000 so the rebound has not been as large. Large-cap holdings, the majority of the portfolio, performed best, up 3.8%. Mid-cap holdings rose 1.3% on average. The small-cap portion of the portfolio currently does not hold any positions, but we anticipate adding new positions soon, most likely in late October as that time of the year has historically been a better time to do so.
Tariff and interest rate concerns that sank the market in August have abated, somewhat. Both China and the U.S. have toned down threatening rhetoric and appear to be looking for a resolution sooner rather than later. Interest rates have also risen off of recent lows suggesting an improvement in growth expectations and possibly an easing in recession fears. However, even with these improvements in the macro environment, traders and investors have continued to keep a close eye on corporate earnings and guidance.
Verint Systems (VRNT) reported earnings that did not quite meet expectations earlier this month. The result was a one-day drop of nearly 14% on September 5. On that day VRNT closed below its stop loss and was closed out of the portfolio the next day using its average price on the day. Lennox International (LII) was also recently stopped out. It has been in a slow and steady trend lower since reporting tepid earnings in July. 
UnitedHealth Group (UNH) was a long-time holding in the portfolio that was added again in June as a defensive, dividend trade. UNH has solid earnings and growth, but apparently the talk about Medicare for all is weighing on the stock. UNH was stopped out of the portfolio in late-August and has been closed out with a modest loss.
This year’s defensive basket of stocks from June are currently up an average 6.3% including stopped out positions. Three positions were stopped out and four ran away and were not added to the portfolio, but the others have performed. Bayer (BAYRY) is the best, up 23.6% at yesterday’s close. AT&T (T) is second best with a 22.6% gain followed by a 21.1% gain by Pattern Energy (PEGI). Terraform Power (TERP), Southwest Gas (SWX) and Alliant Energy (LNT) all ran away and these trades are cancelled.
All positions held in the portfolio are on Hold. So far September has been kind to the market, but headwinds still exist and the “Worst Months” are still in progress. Continue to limit new buying. See table below for updated stop losses.
[Almanac Investor Stock Portfolio Table – September 11, 2019 Closes]
Seasonal Sector Trades & ETF Portfolio Update: Crude’s Seasonal Slump and Defense Pays
By: Christopher Mistal
September 05, 2019
Crude Oil’s Autumn Deterioration
Seasonally speaking, crude oil tends to make significant price gains in the summer, as vacationers and the annual trek of students returning to college in August creates increased demand for unleaded gasoline. The market can also price in a premium for supply disruptions due to threats of hurricanes in the Gulf of Mexico. However, towards mid-September, we often see a seasonal tendency for prices to peak out, as the driving and hurricane seasons begin to wind down. Crude oil’s seasonal decline is highlighted in yellow in the above chart.
[Crude Oil (CL) Weekly Bars and Seasonal Trend Chart (Weekly Data Aug 2018 – September 5, 2019)]
Last year crude peaked nearly right on cue, in late-September/early-October just shy of $75 per barrel. When the decline ended in December, crude traded under $45 per barrel. From late-December until late April crude recovered to trade over $65 per barrel. The trend since then has been lower and that trend looks poised to continue and potentially accelerate. A persistently firm U.S. dollar is likely to limit upside while ongoing trade troubles and slowing growth are likely to dampen demand.
[ProShares UltraShort Bloomberg Crude Oil (SCO) Daily Bar Chart]
ProShares UltraShort Bloomberg Crude Oil (SCO) is one vehicle to take advantage of seasonal weakness. SCO’s benchmark is the Bloomberg WTI Crude Oil Sub index which is comprised entirely of crude oil futures contracts. SCO is designed to return 200% of the inverse of the daily move of this index and has nearly $100 million in assets. Its expense ratio of 0.95% is about average for a leveraged, inverse ETF.
Crude oil’s recent strength has caused a corresponding decrease in SCO. As a result, stochastic, relative strength and MACD Buy indicators applied to SCO are all near oversold levels. SCO could be considered at current levels up to a buy limit of $16.90. SCO will be tracked in the Almanac Investor Sector Rotation ETF Portfolio. If purchased, an initial stop loss at $15.60 is suggested.
Sector Rotation ETF Portfolio Updates
Turbulent trading in August driven by growing recession fears, inversion in the Treasury yield curve and a slowing growth all drove demand for safe-haven, defensive positions throughout the month of August. As a result traditionally defensive sectors and corresponding holdings in XLP, XLV and XLU held up well in August. XLP, XLV and XLU are on Hold.
Precious metals also had a good August. Positions in GDX, GLD and SLV were all added to the portfolio on the second trading day of August as they all briefly dipped below their respective buy limits. Prior to today’s retreat, GDX, GLD and SLV were up an average of 13.3%. Today’s weakness is likely to be brief. The global trend in interest rates is clearly lower with negative rates prevalent throughout numerous developed markets outside of the U.S. GDX, GLD and SLV are on Hold.
iPath Bloomberg Livestock (COW) did not fare as well as the rest of the portfolio. This position was established with a relatively tight stop loss which did limit losses to 3.9%. Since closing out the position in early August, COW has only declined further. Until there is some clarity on trade, it may be best to avoid commodities, especially those that are domestically produced.
Last month’s new trade ideas, IBB and IYW, targeting seasonal strength in biotech and high-tech, remain open positions. Buy limits were set significantly below the market at that time and are still well below current levels. Even after recovering most of the losses that occurred in August, there still remains a possibility better prices could be available later in September or October.
Please see table below for current advice, updated buy limits and stop losses.
[Almanac Investor SR ETF Portfolio – September 4, 2019 Closes]
Tactical Seasonal Switching ETF Portfolio Update
The second month of the worst two-month span (August-September) has arrived. Thus far, thanks to some upbeat news about trade, stocks are in the green so far. But it is only the third trading day of September and today’s “good” news could be just as quickly reversed by “bad” news tomorrow. Market volatility is still elevated. If you are following this strategy, stick with it. Our Seasonal MACD Buy Signal sometime after October 1, will confirm when to consider stocks again.
Defensive, “Worst Months” positions in the portfolio have been performing well. iShares 20+ Year Treasury Bond (TLT) has a 19.3% gain as of yesterday’s close. AGG and BND are also positive with gains of 5.3% and 5.7% respectively. AGG, BND and TLT are on Hold.
[Almanac Investor TSS ETF Portfolio – September 4, 2019 Closes]