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Dave & Donald Moenning

Mr. David Moenning is a full-time professional money manager and is the President and Chief Investment Officer for his Chicago-based Registered Investment Advisory firm, Heritage Capital Management (...

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What Do The Cycles Say About October?

Based on the early action, it appears that traders have moved into a schizophrenic mode as Tuesday's gains could be reversed quickly at the open.

At issue is the simple fact that no one really knows what to expect in terms of the duration of the government shutdown. And, the bottom line is markets hate uncertainty.

Optimism Fading Fast

At least part of Tuesday's advance was based on the idea that the government shutdowns since 1980 have not produced large sell-offs in the stock market. While the algorithms have been trained to react at the speed of light to any and all headlines coming out of Washington D.C., reports made the rounds yesterday that historically, stocks have managed to advance the vast majority of the time (ten out of eleven occurrences) in the two weeks following a government shutdown.

In addition, there was the Bloomberg report which stated that since 1976, the S&P has risen 11 percent on average in the ensuing twelve months following a shutdown. Given that such a return is actually higher than the average twelve-month period returns seen in the stock market, some traders may have decided to take a more upbeat stance - especially with the S&P having been down seven of the past eight sessions and having become oversold in the process.

Back To Reality - And the Debt

However, traders appear to be back to reality on this fine Wednesday morning. The fear is that with the political brinkmanship showing absolutely no signs of abating, the drama could easily continue for a while and eventually spill over into the debt ceiling deadline.

Frankly, the worry has always been about the debt ceiling. Treasury Secretary Lew said Tuesday that his department is taking extraordinary measures in its efforts to avoid running out of money the middle of this month, but that his options are running short. Since most traders likely remember that the credit rating of the U.S. government was stripped of its 'AAA' status the last time Congress failed to act on the debt ceiling in a timely manner and that stocks suffered mightily in response, traders appear to be heading to the exits at the present time.

Time To Review The Cycle Projections

Although the news of the day is likely to dominate trading in the coming days and weeks, investors should remember that the month of October has a bad reputation for generating large losses. So, with the market looking uncertain, it is time to review what the historical cycles have to say about the month October.

Since this is the tenth review of the cycle composite this year, there is probably little need to go over all the disclosures/disclaimers again. The bottom line is that analysis of cycles should not be used in a vacuum or as a stand-alone indicator. However, the data continues to be an important input into our daily and weekly Market Environment models.

For anyone new to this analysis, the cycle composite is a combination of the one-year seasonal, the four-year Presidential, and the 10-year decennial cycles - all going back to 1928.

October Has a Bad Reputation

Most investors likely live in fear of the month of October as the month's bad reputation has been earned on the back of numerous market crashes over the years. However, it is important to note that when the market isn't involved with a horrific decline, October isn't half bad. But given the market's propensity to dive hard during the month, there are certainly some traders who enter October with a cautious stance.

Is The Market In Sync With The Cycle Projections?

The first step in the analysis of the cycles is to get a feel for whether or not the cycle projections are "on" or not at the present time. Looking at how the market acted relative to the cycle composite in September, it should be noted that the stock market went opposite the cycle composite's projection in the first half of the month and then got back in sync in the second half.

But from a longer-term point of view, the market (as defined by the S&P 500) continues to generally act in accordance with how the composite projection says it should in 2013. And in looking at the market versus the projections since 2009, it is clear that the S&P is fairly close to where it is projected to be.

What Does October Look Like?

The next step is to take a look at what the cycle projections are calling for during the coming month:

One-Year Cycle: The picture painted by the one-year seasonal cycle is not terribly positive. After a period of sideways consolidation in the first part of the month, volatility returns. And after an intense move in both directions two-thirds of the way through the month, a downtrend materializes that lasts until the beginning of November.

Four-Year Cycle: The four-year Presidential cycle projection is similar to the one-year, although the moves are more clear and pronounced. In short, the month opens with a rally and then the meaningful correction that began in August resumes into the end of the month.

10-Year Cycle: The good news is the 10-year cycle looks very different from the one- and four-year cycles. The 10-year suggests the month will be more of a sideways affair and end on a positive note (and with a plus-sign).

The Cycle Composite: The overall cycle composite suggests that October will be volatile with an early rally giving way to a stout pullback and then a modest rally into the end of the month.

So there you have it. It would appear that the cycles are suggesting that the current stalemate in D.C. will (a) continue and (b) produce some damage to investors' portfolios. Here's hoping that the projections are wrong and that the politicians come down off of their high horses sooner rather than later.

Click Here For More "Daily State of the Markets" Commentary

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. Fun and Games in Washington (I.E. the Gov't Shutdown and Debt Ceiling)

      2. The State of Fed Policy

      3. The Outlook for the U.S./Global Economy

The State of the Trend

We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Negative
(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Moderately Positive
(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 12 months)

Key Technical Areas:

Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:

  • Near-Term Support Zone(s) for S&P 500: 1680

  • Near-Term Resistance Zone(s): 1700

The State of the Tape

Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...

  • Trend and Breadth Confirmation Indicator: Neutral

  • Price Thrust Indicator: Moderately Positive

  • Volume Thrust Indicator:Neutral

  • Breadth Thrust Indicator:Neutral

  • Bull/Bear Volume Relationship: Moderately Positive

  • Technical Health of 100 Industry Groups: Moderately Positive

The Early Warning Indicators

Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.

  • Overbought/Oversold Condition: The S&P 500 is moderately oversold from a short-term perspective and is neutral from an intermediate-term point of view.


  • Market Sentiment: Our primary sentiment model is negative .

The State of the Market Environment

One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.

Weekly State of the Market Model Reading: positive

If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.

Turning To This Morning...

Not much new to report as the focus remains on the political games playing out in Washington. However, the ADP Employment report (which details job creation in the private sector) may provide a bit of a distraction given that the release of the monthly Jobs report is now a question mark due to the shutdown.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:

- Japan: -2.17%

- Hong Kong: closed

- Shanghai: closed

- London: -0.54%

- Germany: -0.37%

- France: -0.61%

- Italy: +1.46%

- Spain: +0.17%


Crude Oil Futures:
-$0.01 to $102.03

Gold: +$8.600 to $1294.70

Dollar: higher against the yen and euro, lower vs. pound.

10-Year Bond Yield: Currently trading at 2.648%

Stock Futures Ahead of Open in U.S. (relative to fair value):

- S&P 500: -7.35

- Dow Jones Industrial Average: -41

- NASDAQ Composite: -9.85

Thought For The Day...

Don't forget, ego is the real enemy in this game...

Looking for Guidance in the Markets?

The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis - Check the "Daily Decision" System. Forget the fast money and the latest, greatest option trade. Investors first need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision system was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.

The Insiders Portfolio: If you are looking for a truly unique approach to stock picking - Check out The Insiders Portfolio. We buy what those who know their company's best are buying - but ONLY when they are buying heavily! P.S. The Insiders is up over 30% in 2013 and has nearly doubled the S&P 500 since 2009.

The IRA/401K Advisor: Stop ignoring your 401K! Our long-term oriented service designed for IRAs and 401Ks strives to keep accounts positioned on the right side of the markets. This is a service you really can't afford not to use.

The Top 5 Portfolio: We keep things simple here by focusing on our five favorite positions. This concentrated stock portfolio employs a rigorous custom stock selection approach to identify market leaders. Risk management strategies are built in to every position.

All StateoftheMarkets.com Premium Services include a 30-day money-back guarantee!

Got Research?

Remember, you can receive email alerts for more than 20 free research report alerts from StateoftheMarkets.com including:

State's Chart of the Day - Each day we highlight a top rated stock with a positive technical setup.

The Risk Manager Report - Stay in tune with the market's risk/reward environment.

The “10.0” Report - These are the REAL best-of-breed companies.

The Insiders Report - See what the people who know their company's best are buying.

ETF Leaders Report - Looking for the top performing ETF's? You've come to the right place.

The SOTM 100 Portfolio - The top rated stocks in each market sector.

State's Market Models - Each week we quantify the "state of the market" with a series of models.

The Focus List - Think of the focus list as your own private research department. We do all the work and highlight our top picks each trading day

Mission Statement

At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.

Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.

Wishing you green screens and all the best for a great day,

David D. Moenning

Founder and Chief Investment Strategist

StateoftheMarkets.com

For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

Positions in stocks mentioned: none


The opinions and forecasts expressed are those of David Moenning, founder of StateoftheMarkets.com and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

The information contained in our websites and publications is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Tags: Jack Lew October

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