Historical trends are great over the long term but are subject to disruption by other events.
Typically Monday would start the best six month period of Q4. However, this year is hardly typical. We did see the first two weeks of October perform according to historical norms with losses in both weeks and the indexes dipped to three-month lows last week.
Normally the last two weeks of October are positive a fund managers buy the early October dip and window dress their portfolios for their fiscal year end on October 31st. However, this is not a normal year with the most news filled and hostile presidential campaign in history. There are so many news headlines on a daily basis that reporters cannot cover all the news.
The presidential campaign is not going well for either candidate but Clinton has the good fortune to be running against Trump. A dump of more than 11,000 hacked emails with every piece of negativity you could imagine, has failed to gain media attention and been overshadowed by the sex tales following Trump around the country.
The debate on Wednesday could turn into a mud wrestling slugfest with each party trying to outdo the other by spreading the most dirt. Trump is a severe underdog but his fans are rabid supporters. Clinton has trouble getting a couple hundred fans to turn up for an event so she has severely reduced her appearances to avoid being embarrassed. It will be very interesting to see if the polls are right or wrong when election day arrives. Some pollsters claim respondents are reluctant to name the person they are voting for because they are embarrassed to admit it.
The market was expecting a Clinton win with the republicans maintaining control of the house and senate. That would ensure gridlock for the next 4 years and the market would rise. However, some analysts are speculating the black hole surrounding Trump is so strong it is going to suck down ballot republican candidates into the abyss and potentially allow for the democrats to regain control of the senate and possibly the house. That would be a disaster for the markets.
Analysts believe democratic control of the house, senate and presidency would lead to more regulation, more taxes, more social programs, a bigger Obamacare program, drug price controls, more deficit spending and liberalizing the Supreme Court for a generation to come. They suggest it could lead to a bear market and a recession. The market would collapse as biotechs, healthcare, energy and financials declined in anticipation of new regulations and the possibility of forced breakups of the big banks. If the democrats gain control of the senate, Bernie Sanders becomes the head of the Senate Budget Committee. Climate change and government single payer healthcare would become top priorities. This makes the Wednesday debate even more important and the reactions in the polls over the week that follows.
I did not mean for this commentary to turn into a political rant but those are the factors that will be impacting the market over the next several weeks. We are not likely to see a business as usual market.
The S&P dipped below critical support at 2,120 on Thursday and has closed below the 100-day average for the last four days. While this could be just normal early October weakness, it has put the index in a precarious position. Another dip below 2,120 could be terminal for the three months of levitation that kept the S&P near the recent highs. There is a lot of air on the chart under that 2,120 level and we could be looking at a sharp drop if the headlines turn negative.
Dow support at 18,100 is equally as critical as the 2,120 level on the S&P. With 11 Dow components reporting earnings next week, we have the potential for positive news and negative news. Positive news tends to last 1-2 days but negative earnings news can last for weeks.
The Nasdaq was the strongest index until Tuesday's decline. The Nasdaq 100 made a new high the prior Friday and then both indexes crashed back to support, dragged down by the biotech sector. The 5,200 support level is critical followed by 5,100.
The small cap Russell 2000 is said to be the market sentiment index. The Russell is being dragged lower by the biotech sector and support at 1,210 followed by 1195-1205 is critical. A break under 1,195 would target 1,095 and a significant drop that could create a market correction.
The economy is losing steam fast. The Atlanta Fed real time GDPNow for Q3 has fallen from a forecast for 3.8% growth in early August to 1.9% on Friday. At this recent rate of decline we could see another sub 1% growth quarter. It is tough to see how the Fed could raise rates in this environment but their constant chatter about rate hikes in a weak economy is causing market stress. That could accelerate as October progresses.
The two hurdles on the calendar are the debate and the Mario Draghi press conference on Thursday. A material change to the monetary policy for the ECB could impact our markets significantly and that makes Thursday's event a critical hurdle.
The S&P futures opened up slightly positive on Sunday night and then faded to -7.50 by 6:40 PM. That is a decent decline but it could be erased in a matter of minutes on positive headlines overseas. However, with the U.S. markets closing on their lows on Friday, there is the momentum factor to consider.
I would continue to add stocks to your shopping list with entry points at various support points below the current level. While I do not expect a material decline, there are events on the calendar that could produce the negative headlines needed to force the markets lower.
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