October Buy-the-Dip Trick Or Treat?

So much for the typical October strength in equities – a month in which the major US indices historically have gained ground 75% of the time. We’ve seen major index support levels broken while earnings beats have been smaller than we’ve seen over the past year with revenue and forward guidance giving investors jitters.

Over the summer and through September we warned that this earnings season would likely be a very bumpy ride as earnings would probably be decent, but guidance would not support the market’s multiples. Our concerns have proven warranted. Overall this earnings season the average company that has reported saw its shares fall 2% on its earnings reaction day – if this keeps up it will be the worst stock performance reaction on record since 2001.

How bad has it been?

  • On Wednesday, October 24, the Nasdaq had its worst daily drop since 2011, closing the day down over 10% from its recent highs and by the close of the trading day, the Dow Jones Industrial Average and the S&P 500 had lost all their gains for the year. If the market’s close in the red again Friday, the S&P 500 will have closed down 15 days during the month thus far, the most since 2012.
  • The FAANGM stocks entered a bear market this week, losing 4.4% on Wednesday – the worst decline since August 2011.
  • The Global MSCI All World Index hit a 14-month low, in bear market territory with a more than 20% decline since the January highs, losing 11% in October alone – the biggest decline since the financial crisis. This week only 4 of the 47 countries in the MSCI all country world index were above their 200-day moving average.
  • Homebuilder stocks have fallen more than 40% from their January highs – the canary in the consumer coal mine. New home sales plunged 5.5% in September versus expectations for a -0.6% decline as the supply of homes for sale rose +2.8% (the sixth consecutive increase) to the highest level since 2008 while demand has fallen to a 2-year low. Tell me again how great that consumer is doing and how they might contend with 5% mortgages? As those homes become more expensive to purchase, fewer Middle-Class Squeeze consumers will be filling out a mortgage application.
  • The only two S&P 500 sectors in the green this month are defensive – Consumer Staples (+1%) in the midst of its longest winning streak since November 2009 and Utilities (+3%). Even one of the must-have lifelines for our Digital Lifestyle investing theme mobile service wasn’t a safe haven as AT&T (T) shares fell some 9% this week hitting a new 52-week low in the process.
  • This week the Russell 2000 small cap index fell over 15% from its highs, closing Wednesday just 5 points away from a new 52-week low.
  • After spending 262 consecutive days above its 200-day moving average, oil closed this week below that marker. Streaks of such magnitude have only happened two other times over the past 30 years – April 10, 2000, which ended a 272-day streak and September 2, 2008, which ended a 330-day streak. Those dates are worth noting.
  • The first 18 trading days in October have seen a daily open to close loss 83.3% of the time, besting the previous 75% record in September of 2000. If the market rallies from open to close on the next 4 trading days, October’s closed in the red versus open will be 65.2% of days – the worst for any single month since October 2008 which was at the height of the financial crisis – and that is the very BEST we could hope for.
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