A Tale of Two Indexes
Perhaps we can all breathe a sigh of relief now that Halloween has come and gone…
The market was certainly haunted this October. It was a month of frightening performance for stocks.
But after a hopeful bounce midweek, maybe the market can exorcise its bearish ghosts.
The S&P 500 Index tanked over 10% at the lows last month, which was the worst showing for stocks in ANY month since February 2009.
It was a relentless decline with the S&P down 16 out of 22 trading days, the most one-sided stock slide for any month since 1970!
It was also the worst October performance since October 2008. You may recall that came during the global financial crisis, which mauled the S&P 500 for a 57% loss in just 18 months.
And if the S&P’s spooky performance isn’t bad enough, consider the Nasdaq dropped 15% and the Russell 2000 small-cap index plunged 16% at the recent lows before rebounding a bit this week.
The carnage isn’t limited to U.S. stocks, either. In fact, they have fared much better than the rest of the world.
Japan is down 18%, European stocks dropped 22% and emerging markets plunged nearly 25% this year. In fact, global stock markets lost a total of $8 trillion worth of market value last month alone!
You can understand why many investors are wondering if this is a scary sequel to the 2007–09 bear market.
I don’t think so. In fact, I’m seeing some hopeful signs the sell-off may be nearing an end.
Source: Computer Trade Systems, Yahoo Finance
First, as you can see above left, the number of stocks on the NYSE making new lows has been extreme lately.
But this measure peaked out just above 500 twice during October. That’s a potential double top in stocks making new lows.
Second, in the chart above right, you can see the VIX, the stock market “fear gauge,” also shot higher last month. But even though stocks made new lows last week the VIX made a lower high than earlier October.
Taken together, these two measures signal there was less investor anxiety near the month’s end and selling was getting exhausted. Fewer stocks pushing to new lows even while the S&P index made lower lows is a bullish divergence signal that could mean the sell-off is nearly over.
Also, the character of this sell-off has been extreme, more like a whoosh lower than a painfully long topping pattern.
Consider it took just 26 trading days for the S&P 500 to drop 10% from September’s peak. This correction was hard but fast. In fact, it ranks in the top 10 pullbacks in terms of speed dating all the way back to 1950.
Historically speaking, what happened to stocks next after the other rapid stock sell-offs?
Just the opposite!
The S&P rallied for a median gain of 18.5% over the next six months and was up 90% of the time.
Before you go all in, however, keep in mind there are still several negatives lingering into November.
First, the ongoing trade war with China. Trump has threatened more tariffs could be levied in the months ahead.
Plus, the midterm elections are next week and are another major market-moving event.
Bottom line: Don’t be surprised to see more volatility ahead. It’s quite possible stocks could slip below the October lows.
Keep a watchful eye on market breadth measures and the VIX. If breadth doesn’t make new lows or fear does hit new highs, then the worst of the sell-off is likely over.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
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