Stock Market: Here Comes October With Scary Tricks Aplenty

August’s bullish stock market gave way to September’s wobbles. With the median S&P 500 stock now 15% below its 52-week high, will October treat us to investment goodies? Likely, no.

The problem is the shallowness in the market. Over the past year, only nineteen stocks carried the S&P 500 to its new high performance (including dividend income). They, alone, produced the $3.9 T market capitalization gain in the S&P 500.

Disclosure: Author is 100% invested in cash reserves

Look at it this way – Over the last twelve months, the S&P 500’s total return (including dividends) was 15.2%. Remove those nineteen stocks, however, and the return drops to nil for the remaining 481 stocks.

Another concern is the dissipating upward trends for more than one-half the S&P 500 stocks. Here is the picture of the S&P 500 (total return) over the past twelve months, along with the declining percent of the 500 stocks trading above their 50-day moving average. This measure of a shorter-term trend has tracked rising stocks well – until September, when stocks began to fall below it.

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Another way to see the imbalance in the stock market is to look at all the major indexes, not just the S&P 500, DJIA and Nasdaq NDAQ . Note the widespread underperformance by everything except large growth stocks.

Back to fundamentals again

In September 2020, the growth champions began to look like tired marathoners – gasping for breath. That weakening performance means what comes next could be ugly. Fundamentals do not support a relay handoff to another group of stocks.

Don’t remember fundamentals? Small wonder. Their role has had to take back seat due to the coronavirus shutdowns that made second quarter numbers virtually meaningless and reliable forecasts hard to come by. So, investors have had to fall back to judging stocks by their performance. And that has brought back the increased dependence on catchy stories, exciting hype and performance chasing.

Even Apple’s AAPL stock, producer of $1 T of the S&P 500’s annual gain, has far outpaced its fundamental support (see my article, “Stock Market Omen? Apple’s High Price Now Has Weak Fundamental And Technical Support”). It is now 16% below its September 2 all-time high.

Then there is the September 30 (end of third quarter) “window dressing.” Fund managers know being underweight or devoid of the popular winners can make the managers, themselves, unpopular. Small wonder, then, that 15 of the 19 winning stocks outperformed the S&P 500 over the past week (5 days).

October – a month filled with scary tricks

October’s list of potentially negative surprises is long. The month will see the results of…

  • The end of some coronavirus shutdown/unemployment protections and benefits
  • The end of the summer seasonal spending and employment
  • The result of the Fed’s inability to produce real economic improvement (see any of Jerome Powell’s recent pleas to the U.S. congress to do something)
  • The flu season joins the coronavirus pandemic
  • The wildfire and hurricane seasons continue
  • The pre-election, political uncertainties reach a boiling point
  • The malaise among banks continues. From The Wall Street Journal article, “Banks Have Lots of Cash, Little to Do With It” (underlining is mine):

“The banks, a gauge for the broader economy, have signaled they anticipate a longer, deeper recession than they first expected in the spring. Though much of the economy has held up relatively well, the banks say government stimulus and other temporary reprieves have likely delayed the pain, not overcome it. Many lenders are bracing for a wave of defaults.

The turmoil has made it hard to see how banks will grow profits, one reason shares have failed to rally along with the market.”

  • Finally, there are the earnings reports, leading off with JPMorgan Chase JPM on Tuesday, October 13, at 8:30 am. They should be much better than last quarter, but the hoped for growth outlooks might be disappointing.

Can’t the stock market look through all of that to next year’s fundamentals?

It can try, but Wall Street was already been doing that. Sunny visions of 2021 growth is what helped drive the stock market to where its August highs. Now, perhaps, it is time for the less optimistic possibilities to be revisited. Large uncertainty remains, allowing optimistic beliefs to be consumed easily by pessimistic ones – and vice versa.

The bottom line: Be prepared for the October stock market to disappoint, but, perhaps, also to deliver some buying opportunities

Some consider the stock market’s weak September performance to provide a buying opportunity. More likely, though, it is a readjustment back to a more realistic, fundamental basis. Therefore, to regain lost ground, Wall Street will require some of those October issues to resolve themselves positively.

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