Mid-week market update: Ryan Detrick has been correctly bullish during the rally from late 2023. He recently pointed out that it may be time for the stock market to take a breather, “October higher only once out of six times it was up 30% or more going into Q4 and Q4 below avg returns as well”.
I am similarly intermediate-term bullish. Though at this point, I am just trying to survive October without any significant drawdowns.
October election jitters
Historically, stocks suffer from pre-election jitters in October. Here is how the VIX Index behaves during Octobers during election years.
We can see that in the term structure of the VIX. The 1-month to 3-month ratio is nearly inverted, while the 9-day to 1-month ratio is normally upward sloping. The key difference is the 1-month VIX extends just after the election, which could be potentially chaotic, while there is little anxiety over the 9-day outlook.
The three-headed monster
In addition, the three-headed monster, Treasury yields, the USD, and oil prices, are all spiking. This will create headwinds for stock prices. In particular, it’s disconcerting that the 10-year yield has now risen to above 4% after the Fed cut rates.
Notwithstanding macro headwinds, I am equally concerned about the stall in EPS estimate revisions as we head into earnings reporting season. Past episodes of flat forward EPS have seen declines in the S&P 500.
Tactically, Goldman Sachs projects that Commodity Trading Advisors (CTAs) will be selling S&P 500 futures under every scenario for the next week and next month. In the worst case, the selling pressure could be as much as $38 billion in a down tape.
That said, I am not overly worried about a significant pullback from current levels. Even as the S&P 500 trade sideways, market internals such as the NYSE McClellan Oscillator (NYMO) and the Zweig Breadth Thrust Indicator, are nearing oversold levels. If the stock prices were to fall, these readings suggest that downside risk should be limited.
The disconcerting thing is that the VIX is still relatively high at > 20 even though there has been no significant downside price action to respond to. Most of the time the VIX goes high when the price goes down as can be seen in the last few years.
The last time I saw such a long divergence was in the couple of weeks before the “correction” in early February 2018. It was particularly noticeable in the VIXY , the VIX short term futures.