October 2023 Trading and Investment Strategy
September 28, 2023
Market at a Glance - 9/28/2023
By: Christopher Mistal
September 28, 2023
Please take a moment and register for our member’s only webinar, October 2023 Outlook and Update on Wednesday October 4, 2023, at 2:00 PM EDT here:
Please join us for an Almanac Investor Member’s Only discussion of recent market action with time for Q & A at the end. Jeff and Chris will cover their outlook for October, review the Tactical Seasonal Switching Strategy ETF with an update of our Seasonal MACD indicator, Sector Rotation ETF, and Stock Portfolio holdings and trades. We will also share our assessments of the Fed, inflation, the upcoming "Best Months" as well as relevant updates to seasonals now in play.
If you are unable to attend the live event, please still register. Within a day of completion, we will send out an email with links to access the recording and the slides to everyone that registers.
After registering, you will receive a confirmation email containing information about joining the webinar and a reminder message.
Market at a Glance
9/28/2023: Dow 33666.34 | S&P 4299.70 | NASDAQ 13201.28 | Russell 2K 1794.31 | NYSE 15478.07 | Value Line Arith 8971.98
Seasonal: Improving. October is the last month of DJIA and S&P 500 “Worst Six Months” and NASDAQ’s “Worst Four Months.” October has turned the tide in 13 post-WWII bear markets. Pre-election year October performance is haunted by 1987, but over the last 21 years, October is the #2 DJIA and NASDAQ month of the year, #4 for S&P 500.
Fundamental: Mixed. Q2 GDP was unchanged at 2.1%, but revisions to past data generally reflected softer consumer spending and higher than previously reported inflation metrics. Despite a modest uptick in the unemployment rate to 3.8%, employment data overall is holding up with a mild softening trend. Auto workers on strike and a looming federal government shutdown further muddles the near-term outlook. Oil has climbed above $90 per barrel and the Atlanta Fed’s GDPNow model is still forecasting growth of nearly 5% in Q3. Near-term risks abound, but timely solutions remain in the best interest. 
Technical: Seasonal Retreat. Thus far, market weakness appears to be just typical August-September seasonality playing out. Headline risk remains elevated. DJIA and S&P 500 have both closed below their respective 200-day moving averages, but NASDAQ remains above its 200-day moving average. All three have closed below their August closing lows. Oversold indications are building and if NASDAQ, leadership throughout the year, can hold above its 200-day average then a Q4 rally is still expected.
Monetary: 5.25 – 5.50%. The Fed’s message was loud and clear, rates could still go higher yet and expect them to remain there longer too. The positive spin is that they have gone from effectively zero to over 5% so another 0.25% increase is not that big of a deal and the Fed still anticipates cutting rates sometime in 2024.
Sentiment: Retreating. According to Investor’s Intelligence Advisors Sentiment survey Bullish advisors stand at 43.7%. Correction advisors are at 32.4% while Bearish advisors numbered 23.9% as of their September 27 release. Over the last four weeks sentiment did improve in early September but has retreated to around levels seen after August’s lows. Bullish sentiment likely needs to decline further before the market can finally turn the corner. 
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
October 2023 Almanac & Vital Stats: A Turnaround Month
By: Jeffrey A. Hirsch & Christopher Mistal
September 21, 2023
Buy In October and Get Your Portfolio Sober!
Kick-Off the “Best Six Months” LIVE and in-person with Jeff at the MoneyShow/TradersEXPO Orlando October 29-31 and the 2023 New Orleans Investment Conference November 1-4. Ring in the pre-election year Q4 rally with me in the flesh at these two world-class events. September seasonal weakness and Octoberphobia are likely to scare the market ahead of this Halloween tour over the next several weeks. Come join me so we can discuss in person how to implement my Best Six Months Tactical Seasonal MACD Buy Signal, our next market moves, and what stocks and ETFs I will be buying and selling this season.
October 2023 Almanac & Vital Stats
October can evoke fear on Wall Street as memories are stirred of crashes in 1929, 1987, the 554-point DJIA drop on October 27, 1997, back-to-back massacres in 1978 and 1979, Friday the 13th in 1989 and the 733-point DJIA drop on October 15, 2008. During the week ending October 10, 2008, DJIA lost 1,874.19 points (18.2%), the worst weekly decline, in percentage terms, in our database going back to 1901. March 2020 now holds the dubious honor of producing the largest and third largest DJIA weekly point declines. 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.
October has been a turnaround month—a “bear killer” if you will, turning the tide in thirteen post-WWII bear markets: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002, 2011 (S&P 500 declined 19.4%), and 2022. DJIA was first to bottom last year on the last day of September. S&P 500 ended its bear market on October 12 while NASDAQ did not reach a final closing low until December 28. Eight of these were midterm years. While not in an official bear market this year, the market is suffering through typical seasonal weakness which could once again come to an end in October.
Over the last twenty-one years, the full month of October has been a solid month for the market, ranking #2 for DJIA and NASDAQ, #4 for S&P 500. DJIA, S&P 500, NASDAQ, Russell 1000 and Russell 2000 have all recorded gains ranging from 1.3% by Russell 2000 to 2.2% by NASDAQ. But these gains have come with volatile trading, most notably during the early days of the month. October has opened softly with modest average gains on its first trading day. On the second day, all five indexes have been weak followed by a rebound on the third trading day before additional weakness pulled the market lower through the seventh trading day. At which point, the market has historically found support and begun to rally through mid-month and beyond. In pre-election years since 1950, October has been stronger in the first half of the month and weaker in the second half. October 1987’s substantial declines heavily influence the pre-election year pattern.
[October 21-Yr Seasonal Patterns Chart]
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 1.5%. Eliminating gruesome 1987 from the calculation provides only a moderate amount of relief. Should current weakness persist into October it is likely to provide an excellent buying opportunity, especially for depressed technology and small-cap shares.
[Pre-Election Year October Performance Mini Table]
Options expiration week in October provides plenty of opportunity. On the Monday before monthly expiration DJIA has only been down 10 times since 1982 and the Russell 2000 is up twenty-four of the last thirty-three years, seventeen straight from 1990 to 2006. Expiration day has a mixed record while the week as a whole has been improving with S&P 500 recording eight straight weekly advances coming into this year. After a market bottom in October, the week after is most bullish, otherwise it is susceptible to downdrafts.
[October 2023 Vital Stats Table]
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 MACD Buy Signal which can occur anytime beginning October 2 (the first trading day of the month this year). We will email all members after the close when our seasonal buy triggers.
October 2023 Strategy Calendar
By: Christopher Mistal
September 21, 2023
End of Q3 & Stock Portfolio Update: Seasonal Patterns Signal Weakness
By: Christopher Mistal
September 14, 2023
Despite the biggest monthly jump in the producer price index (PPI) since last June being reported today and the largest monthly jump in the consumer price index (CPI) also since last June, yesterday, the market charged higher today. This month’s CPI and PPI reports were the second in a row to show an uptick in inflation. The trend lower from last year’s peak is still in place, but the path back to the Fed’s target of 2% is getting even longer and more uncertain.
[CPI Projection Chart]
August’s actual 12-month CPI change has been added to our CPI projection chart above and the projection has been updated out to August 2024. We have also added a monthly 0.6% change line as that was the headline change in CPI for August 2023. Based upon the updated projections, even with a tiny 0.1% monthly increase in CPI, it would take eight months for 12-month CPI to fall below 2%. This works out to be April 2024 CPI, released in May. Will the Fed wait out inflation, raise rates further or increase its target to be more inline with historical inflation levels? In the near term, it would seem waiting is the most likely path with odds of a September rate increase in the single digits according to CME Group’s FedWatch Tool.
With the Fed on the sidelines, end-of-quarter portfolio rebalancing and quarterly options expiration are likely to be the key forces driving the market. As of today’s close, DJIA is up 0.53% this September. S&P 500, NASDAQ, Russell 1000, and Russell 2000 are all still in the red. Except for DJIA, performance this September has been below average. This potentially does not bode well for the second half of September.
[September Seasonal Pattern Chart]
Over the last 21 years, the market has tended to peak on or around the 11th trading day of September (September 18 this year). The average decline from mid-month through the end of the month has been around 2%. We maintain our restrained outlook for the remainder of September and into October. Inflation’s cooling trend is being challenged by rising energy prices and geopolitical concerns are numerous. 
Stock Portfolio Updates
Over the last five weeks since the last update through yesterday’s close (September 13), S&P 500 eased 0.01% lower while Russell 2000 dropped 4.7%. Over the same period the entire portfolio slipped 0.4% lower, excluding dividends, any interest on cash and any trading fees. Small-cap portfolio positions declined the most, off 6.9% on average. Large caps slipped 2.5%, but Mid-caps advanced 2.6%. The sizable cash balance in the portfolio reduced volatility. We anticipate putting this cash back to work in new stock trade ideas soon as seasonality begins to improve when the “Worst Months” end.
After trading up near its old 52-week high in August, MGP Ingredients (MGPI) did succumb to broad market weakness but appears to have found support. Continue to Hold MGPI. Navigator Holdings (NVGS) was basically flat since the last update moving from a little over $14 per share to a little under at yesterday’s close. At some point the rally in crude oil could lift natural gas price until then, NVGS is on Hold
AI stocks, Super Micro Computer (SMCI) and Axcelis Technologies (ACLS) have begun to recover after their respective brisk profit-taking retreats in August. SMCI and ACLS are higher now than five weeks ago. Like many new advances, AI has been in headlines and conversations on how it should be regulated and used. More volatility is expected as a result. SMCI and ACLS are on Hold.
Lead contamination and potential competition from Amazon have kept AT&T (T) in the red in the portfolio. Both concerns are likely overblown and there are a few signs that T may finally be heading down the path of recovery. Recent comments from T’s CFO about the lead issue and free cashflow were positive and shares were up 3% today. Plus, T’s dividend, above 7%, remains attractive. T is on Hold.
All positions not previously mentioned are on Hold. The worst two months are nearly past, but more weakness and volatility are possible as the historically turbulent end of Q3 approaches.
[Almanac Investor Stock Portfolio Table]
ETF Trades: September Seasonal Selling Sets Up Q4 Rally
By: Jeffrey A. Hirsch
September 07, 2023
For those who were unable to attend the member’s only webinar on Wednesday, the slides and video recording are available here (or copy and paste in a new browser window: https://www.stocktradersalmanac.com/LandingPages/webinar-archive.aspx). I reviewed the status of the “Worst Months” correction so far and the outlook for the rest of 2023. The hot July market did succumb to the usual August correction, but the bulls came back in toward the end of the month, mitigating the selloff. As the calendar rolled into September markets and pundits have gotten jittery again right on cue. 
I touched on the several economic crosscurrents rattling the market currently. Rising fears of inflation being done cooling have put upward pressure on the 10-year Treasury bond yield. This raises the prospects of the Fed not cutting rates anytime soon, increasing them further or at least keeping them higher for longer. This has put pressure on equities at the time of the year when stocks are most prone to weakness.
Robust GDP estimates, while good news for the economy, further fans the inflation and high interest rate flames. Rallying oil prices are also adding to the fears of inflation and elevated rates. We don’t see any prospect for energy prices cooling down and for this reason we are passing on the seasonal Oil & Gas stock sector short that runs from September to November, more on that in a moment. 
As illustrated here in our familiar updated charts, the market continues to follow the trend of our seasonal and 4-year cycle patterns we have been monitoring throughout the year. We anticipate additional weakness through September and potentially into October. September-Octoberphobia combined with inflation and rate fears is likely to trigger further market weakness over the next month or so. A financial sector surprise is also still on the table. We do however expect this weakness to be temporary, in the minor correction range of 5-10%. And this should set up the perennial pre-election year Q4 rally and a solid “Best Months” Seasonal MACD Buy Signal.
[NASDAQ Seasonal Cycle Chart]
[S&P Seasonal Cycle Chart]
[4-year Cycle Chart]
Passing On September Oil & Gas Sector Seasonal Short
Although the oil and gas sector has rallied substantially off the June lows ahead of the seasonal short trade from the beginning of September to the end of November, we must pass on this trade. We don’t like the set up technically or fundamentally. As you can see in the chart of near-term crude oil futures the triple (or even quadruple or quintuple) bottom in June was coming off a long downtrend. That downtrend was first broken in April, which then became support. Then the reduced supple situation sent crude soaring. It has broken through resistance at the April high around 83 and looks headed to take out resistance at the October/November high around 93 soon. 
Here is a chart of the Oil & Gas Sector Index (XOI) along with its seasonal pattern overlaid with SPDR Energy ETF (XLE) and First Trust Natural Gas ETF (FCG). First of all, the FCG rally is being driven by rising oil prices as many firms in the fund produce, market and sell both oil and gas. Natural gas prices are generally driven by inventories. The last release (out today) shows an increase week-over-week and year-over-year. This has been the trend much of the year, hence the flatline in natural gas prices.
But most importantly notice how all three are bucking the seasonal pattern and rallying right through the usual weak period. This means other forces are overriding bearish seasonal factors. Russia and OPEC are clearly enjoying the high price of crude and are very unlikely to increase supply. 
It’s also hurricane season and 2023 forecasts suggest it will be a strong one. The National Oceanic and Atmospheric Administration (NOAA) has increased its 2023 Atlantic hurricane season from “near normal” to “above normal.” I don’t know of any forecast for oil demand to come down anytime soon so, it’s not prudent in our view to short XLE or FCG at this time. 
Sector Rotation ETF Portfolio Updates
August’s correction triggered the utilities trade stop. SPDR Utilities (XLU) was stopped out on August 15 when it closed below its stop loss. It was closed out of the portfolio the next day at $63.88 for a loss of -5.2%. The market’s selloff also caused our three short trades to be executed. 
iShares Transportation (IYT) was shorted on August 15 when it broke down below $252.69. The IYT short is on hold, and we have lowered the stop loss to a breakeven $252.69. SPDR Industrials (XLI) was shorted on August 15 when it broke down below $108.78. The XLI short is also on hold, and we have lowered the stop loss to a breakeven $108.78. iShares Semiconductor (SOXX) was shorted on August 10 when it broke down below $498.96. Also on Hold, set the stop at breakeven $498.96. 
We have added auto-sell short cover prices for all three at a full 10 percentage points above the 15-year average return should the September/October correction materialize as we suspect we want to capitalize on that with these short trades. You could also employ a 2% trailing daily stop. All three are currently profitable and added to those gains today.
Last month’s long Info-Tech sector trade in iShares DJ US Technology (IYW) was not triggered in the August selloff, but it is turning lower again so keep the buy limit of $101.50 with an initial stop loss of $93.53 if purchased. Please review the table and be aware of all the stop losses, buy limits and auto-sell prices.
Regarding some of the queries about gold & silver: Robust economic readings in the face of a rising rate environment have made the odds of a recession quite slim which has dampened investor appetite for gold and silver. Both have been trending flat to lower since early May and do not look attractive. Therefore, we are still passing on any trade or position in gold or silver at this juncture.
[Almanac Investor Sector Rotation ETF Portfolio – September 6, 2023 Closes]
Tactical Seasonal Switching Strategy Portfolio Update
September selling is happening. The market is on edge and threatening to go lower for many reasons stated above. The risk of potentially more interest rate increases (or higher-for-longer), a rising 10-year yield and the end of cooling inflation has continued to pressure our longer-dated bond ETFs. Existing positions in TLT, AGG and BND on are Hold. Cash, money market, and/or short-duration bond ETFs like SHV and SGOV are likely to be the least risky over the last two months of the “Worst Months” year. SHV and SGOV can be considered at current levels.
[Almanac Investor Tactical Switching Strategy Portfolio – September 6, 2023 Closes]
Disclosure note: Officers of Hirsch Holdings Inc hold positions in AGG, BND, SGOV, SHV & TLT in personal accounts.