October is on track to become one of the worst months on Wall Street in nearly a decade. Here is a link to download the S&P 500’s monthly returns going back to the end of 1987 – sorted by largest gain to largest decline. Sellers showed up over the past several weeks and sent stocks plunging due to a potentially dangerous one-two punch.

First, the market believes the Federal Reserve and other global central banks are going to become more aggressive which is designed to curb economic growth and inflation. Second, a slew of economic data is already beginning to slow down which is not healthy sign. Remember, the last recession was 10 years ago which is a very long time. Historically, recessions occur every 5-10 years and tend to last around 10-18 months.

Needless to say, we are way overdue for another recession and the same is true for another bear market. The average bear market typically lasts 18-36 months and bear markets tend to occur at least once every decade. The last bear market was in 2008-2009 so we are way overdue for another bear market. Only time will tell when that happens but for now we know the market is very oversold and way overdue to bounce. The key is to analyze the health of the bounce to see if it is another dead-cat bounce or if it has legs. The bulls will argue that the major indices are forming a bullish, albeit sloppy double bottom pattern, while the bears argue the market is topping out and could be forming a large head and shoulders top (Feb’s low was the left shoulder, September 2018 will be the head and then we will form right shoulder then crash). Again, no one knows what will happen tomorrow, but I do know that February’s low is the next important level of support to watch and if that level is breached, odds favor we are headed much lower. I also know that volatility has picked up severely in 2018 and that typically happens near the end of bull markets, not in the early stages. 

Monday-Wednesday Action:

Stocks ended mixed on Monday as the Dow and S&P 500 fell while the Nasdaq eked out a small gain. Bank stocks weighed on the market as the SPDR S&P Bank ETF (Ticker: KBE) slid nearly -3%, posting its worst day since Oct. 10, when it pulled back 3.1%. Banks fell broadly amid worries that higher mortgage rates would adversely affect loan growth. Technically, the major averages hovered near their respective long-term 200 DMA line which has served as support for the past few years. On Tuesday, stocks fell over 500 points at the open before the bulls showed up and spent the day rallying back. Caterpillar, 3M and McDonald’s were just a few of the high profile stocks that reported earnings on Tuesday. This was a very busy week for corporate earnings. More than 150 members of the S&P 500 are reporting earnings this week. According to FactSet, nearly 80% of companies that have reported earnings have beat estimates which bodes well for the market. On Wednesday, stocks plunged and erased 2018’s gains after the latest round of big-cap earnings largely missed estimates. Wednesday’s selling was similar to what we saw in 2008 and in other bear markets. The only good news is that the market is very oversold and way overdue to bounce. The next big level of support to watch is February’s low.

THURSDAY & FRIDAY ACTION:

Stocks rallied on Thursday as the market bounced from deeply oversold levels and the latest round of earnings were announced. The big news in the morning came after Tesla reported a profit for the first time in years. The electric car manufacturer has been under pressure for the last few months because Elon Musk has been sending out weird tweets and has behavior has become very erratic in recent months. After the close, both Amazon (AMZN) and Alphabet (GOOGL) both plunged after reporting earnings. Before Friday’s open, the Commerce Department said the U.S. economy grew by 3.5% beating estimates for a gain of 3.3%. The government also reported that its personal consumption expenditures (PCE) index, a key measure of inflation, rose by +1.6% last quarter which showed inflation may be tame. Friday was another volatile day as stocks traded all over the map.  

MARKET OUTLOOK: STOCKS FLIRT WITH CORRECTION TERRITORY

At the end of September, I noted that the Russell 2000 broke below important support and said it should be watched closely. One week later, we saw a big sell-off on Wall Street as rates spiked. The next big level of support is February’s low. The bulls want to see that level hold. As always, keep your losses small and never argue with the tape. Here is a link to download the S&P 500’s monthly returns going back to the end of 1987 – sorted by largest gain to largest decline.