October 1st, 2009

Bear Hibernation Begins in October

Let me be the first to send out the birth announcements – a new head-and-shoulders top is about to emerge. Or so the bears are soon going to be yelling. Think back to May-July. About every Talking Head on CNBC and most bloggers (except moi) were claiming that the long awaited correction was just about to finally arrive. The only problem was that they all lost sight of the forest because they were fixated on the trees.

We may be looking at a similar chart pattern emerging. It’s very early in the game but the sharp eye of experienced chartists will see what I’m talking about (click on image to enlarge).

As you can see, since you’ve all become great chartists from reading this blog, the market confounded the bears last summer and absolutely ignored what what they claimed was supposed to be a reversal. Now, without the market even yet completing the pattern’s head by bouncing off of a would be neckline, talk may again fill the airwaves and blogosphere about declines all the way to the March lows.

Furthermore, to the Bear’s glee, this time we’ve entered October, supposedly the cruelest month of the year for the stock market (if you don’t believe me, check out the bear cave at Slope of Hope after you finished reading what I have to say where the head “sloper”, Tim Knight, actually titled his post tonight “Our National Nightmare is Over”).

But here’s an interesting fact the Bears won’t mention: the market declined 22.5 point, or 2.21%, this September 1, the worst ever first trading day in September but wound up turning in the best September performances since 1998. October’s opening day mirrored that of September with a 27.23 point delince, or 2.58%. The rest of October could mirror the rest of September.

I’ve marked on the above chart two key support areas: the 50-day moving average at 1021 and a long-term trendline that served as resistance in both November 2008 and all the way back as the peak of the traders’ remorse correction after the Tech Bubble Crash double-bottom in June-October 2003. Resistance levels often turn into support and it may be the same case here.

The last remaining Bear Trap is that October, notorious for crashes, is actually a good average month for the market (click on image to enlarge).

In fact, from 1963-2007, the market end October higher than where they began 62% of the time, or 28 years, and declined only 38% of the years. The worst year, of course was the 1987 crash with a 21.8% decline. When you exclude that year, the average performance in October shows a 1.63% increase with the best performance in 1974 of 16.3%. When coming out of Bear market’s or crashes (see 1982, 2002, 1974, 1998), October’s tend to show some of the best performances.

Let’s hope that as the leaves begin to fall, bears begin hibernating until spring.

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  • Anonymous

    BUT…BUT…BUT Alan Greenspan just called a market top!

  • Jonathan

    Hi Guru,

    I actually think this could THE correction that everyone was waiting for.

    However, I doubt we'll retest the new lows. It is simply a normal correction. Your "famous" trader's remorse".

    We'll keep going higher for a couple of years in my opinion.

    Thanks for your posts.

    Jonathan
    http://guillouj.blogspot.com/

  • Jesse Caris

    you should have waited 1 day to write this (or not write it) as we will be moving through 1021 at the open. Jobs! Once again, you can not have a jobless recovery.

  • Anonymous

    How do you reconcile the break of the bottom trendline on the ascending wedge?

    My suspicion is that the smart money is now slowly liquidating positions and potentially even going short. They cannot allow for a panic selling, otherwise they would not be able to get top dollar. So, you create a market environment where you continually kill all the bears until the bears finally give up. When the bears give up, you start selling in small chucks to john q public. The transfer of wealth is occurring in front of us. Someone has to be left holding the bag.

  • Guru

    Breaking the bottom trendline is disconcerting and raises early warning flags. But it's only a first shot across the bow, a warning. We need more confirmation before taking major evasive action (like moving large chunks into cash).

    The rule has been to sell individual stocks if you have an 8% loss in them. The same should hold for the full portfolio. If you see a 4% loss off the peak value of your portfolio you should start scaling out.

  • Anonymous

    Guru, thanks for the post..

    Look at 5 years chart, SPY is lagging compared to eem & spy. Which index will lead the market when we come out of this mess? Your opinion is highly appreciated.

  • Guru

    I've written about this several times (see "U.S. Stocks:The World's Laggards?"). I think any of the currency or market etf's other than EU should continue to do better than the SPY.

  • Anonymous

    Newbie here, I'm confused by yesterdays blog 'There's little doubt that the market is due for a correction after this 50%, six-month move off the bottom and it will be soon…' and todays bullish(?) comments.I'LL stay tuned!

  • Anonymous

    Thanks for posting your analysis.

    A couple of questions.

    Why 28 years? 28 seems like an unusual number of years. Why not

    Have you ever examined the claims for a 6 month seasonal pattern?

  • JJ

    Guru, would you mind commenting on a few names you mentioned in your post from Sept 20th (New Place to Mine for Winners)? I'm particularly interested in X, CENX and AA. All of which have pulled back significantly, anywhere from 15-30% from recent highs and are very oversold on the daily timeframe. Individually they look like buys here to me, especially CENX.

    Thanks for your analysis.

  • Guru

    Newbie, I can understand you're seeing a contradiction. What I tried to communicate is something consistent what I've I've been saying for some time: 1) I'm hoping for the market to continue into the 1100-1150 range and 2) then consolidate (rather than going into a major retreat back to the March lows as some prognosticators are saying.

    I'm not trying to have it both ways … I believe there will be another 4-5% more on the upside before we get the 10-15% correction.

  • Guru

    JJ, you had to remind me and everyone else? The stocks you mentioned have been inversely related to the value of the %US which, much to my chagrin and dismay, has strengthened in the few days since that post. I continue to believe it's temporary and that the long-term trend (next 12 months) of the $US will be lower rather than higher.

    I personally own both X and CENX and will probably won't sell unless there's a further 5-8% correction because if I thought they were buys a week or so ago then they should be even better buys today. On the other hand, few stocks successfully buck the market so if you don't own it yet, I would wait until the general market firms up.

  • Charts and Coffee

    Watch the dollar. It may be that simple.

  • Minnesotalee

    Hey Guru- listen to your own charting of the trends and not these minor, minor H&S's that you elaborated on. If you must address these patterns rather than the moving averages where we have a supurb picture then look at the major, major H&S pattern from Jan-May 2009. This inverse H&S is worth a ton of USD rather than the minor H&S's you're getting stuck on. The technicals remain strong. The fundamentals of 3rd quarter earnings will be the harbinger of the next move up. Forget these flys on the elephant, These meniscle H&S's are the flys. The bull will shoo mthem off.

  • Minnesotalee

    The bears want desperately to buy in this market. They do it with conviction on the pullbacks. Friday was an example. There has been too much side-lined $$$.

  • Minnesotalee

    Here's my best technical stock pick with an emphasis on Brazil and the olympics. It's VALE. Now at 23 with a PO of 31 on a very recent BUY signal. Just a thought.