The S&P 500: October and Beyond

By Danny Riley

Despite all the the historical negatives surrounding September, the S&P 500 managed to close up +2.42%. Are we surprised? No, we are not! With the ECB and the Fed joining hands, it comes as no surprise at all. … September's bad reputation has been pushed aside over the last several years, with positive closes in 6 of the last 7.

We remember September best for the '87 crash. Brian Shepard and I remember the day like it was yesterday, we were the last people to leave the trading floor. Standing 3ft away from the S&P pit trading at 30 S. Wacker, the S&P pit filled to the brim with locals, order fillers and clerks all watching the S&P pour lower, it looked like the world was coming to an end. That's not how it's worked over the last several years and it's not how it worked this year. In fact, when you combine September's gain over the last 12 months, the Dow is up 23% or 2,500 points. One of the side effects of the credit crisis is that it has left people gun-shy. The ongoing crisis has cast a bad shadow over the markets and with many people having lost 50% or more of their retirement accounts, they are in no hurry to get back in. It's hard for the public to invest in an environment when you constantly see declining business activity.

The debate continues to rage: Is the S&P making a high? With September not following any of its historical negatives, we are back to asking the same old question: What has changed? The way we see it is with September closing out in the black, why try and get in front of this right now? If you are looking for a reason to sell, one big negative hitting the markets that favors the bears is the resurgence of the European headlines with both Greece and Spain. Last week Spain decided it was going to pull 3bil euros from pension reserve funds to cover its liquidity requirements. Adding liquidity will support the markets for a bounce, but in the long term, like most or all of the austerity plans, it has no sustainability. So let's focus on October and see where that leaves us.

October is also known for some big moves both up and down. October ends the worst six months for stocks. October also saw the worst week in history for the Dow, down 1,874 points or 18.2% in the week ending 10/10/08. It's also known as the “jinx” month because of the crashes in 1929 and 1987; the 544-point drop on October 27, 1997; back-to-back massacres in 1978 and 1979; Friday the 13th in 1989; and the meltdown in 2008. Yet the month is also considered the “bear killer” and has turned the tide in 11 post-WWII bear markets. Additionally, November, December and January start the year's best three-month period for stocks and the best six months for the stock market (November to April). The first trading day of October starts out with the Dow down 4 out of the last 6, but the Monday before the October expiration has the Dow up 25 of the last 31 occasions and the October expiration Friday has the Dow down 7 of the last 8. In the crash of Oct. 19, 1987, the Dow was down 22.6% in one day. The end of October is known for buying depressed stock, especially in techs and small caps, as investment firms look for year-end buying opportunities. ELECTION YEAR LOSSES OVER 5% SINCE 1896 Friday started with 312k ESZ and 1.3k SPZ traded on Globex, trading range 1443.50 – 1432.00. Thursday's RTH's, pit range was 1430.00 – 1444.00, settled at 1441.10 up 14.2 handles. ettled at 1426.90 do 6 handles lower to 1435.50 – 1435.20 marking the early high and chopped around in the 1433.70 back up to 1435.80. At 8:45, earlier for some ;) Chicago PMI check in at 49.7, below 50 ain't so good either is going back to Sept 2009 levels. Oh yea, the prices paid 63.2, up from 57 is marking the third consecutive month of inflation. Oh, wait, Didn't the Fed say they are not too worried about inflation? Is it under control with smoke, mirrors and/or their data? 1430.60 traded at 8:47 and then 1429.80 at 8:54 as Michigan sentiment checked in at 78.3 vs exp 79, highest level since May produced a pop to 1433.50 area. Transports were down 60ish points by 9:02 and held as the spoos popped, but made a lower high. mts2 (09:26:39): sell pgm (09:27:39): AAPL, GOOG lows as spoos posted 1429.30 LOD. Scott posted (09:37:27): UVOL/DVOL ratio appears to be stabilizing, now oscillating around -4 to 1 and back to 1433.50 area. Following the Spanish news the shorts covered as the buy stops elected the programs fueling the ride up to 1439.80 HOD at 12:47. What happened next? The WalkAway trade began to run it's course – right down the bulls throat! BAM!!!! The closing imbalance showed 25 of the DOW 30 to the buy side and the broader market showed a huge$1.4Bil to buy. On the 3:00 cash close 1444.00 was trading, settlement was at 1434.20, down 6.9 handles. EOM fixed at 1433.79.

MTS video: http://www.mrtopstep.com/9-28-12-rich-canlione/rtopstep.com/

Some hard facts about the 2012 presidential election:

Regardless of which party wins, the last 7 months have seen gains on the S&P in 13 of the 15 presidential election years since 1950.
The first five months go better when the incumbent party retains the White House. Since 1901 there have been 27 presidential elections. During the 16 times the party in power retained the White House, the Dow gained 1.5% on average for the first five months, compared to a 4.6% loss the 11 times the party was ousted. Since 1950, retaining the White House 7 times brought an average gain of 1.9%, compared to -0.1% the other 8 times.

War can be a major factor in a presidential election: Democrats used to lose the White House on foreign shores (1920 WWI, Korea, 1968, Vietnam, 1980 Iran crisis). Republicans on the other hand lost it at home (1912 party split, 1932 Depression, 1960 economy and 1976 Watergate). Homeland issues have dominated elections the last three decades with Republican loss in 1992 (economy) the Democratic loss in 2000 (scandal) and the Republican loss in 2008 (economy).
Markets bottom two years after a presidential election: A takeover of the White House by an opposing party in the past 50 years (1960, 1968, 1976, 1980, 1992, 2000, 2008) has resulted in a bottom within two years, except in 1994, a flat year. When an incumbent retained power (1964, 1972, 1984, 1988, 1996, 2004) stocks often bottomed within two years as well, except in 1984( three years, 1987) and 2004 (on flat year, 2005). Point being, whatever the outcome, the stock market could see a bottom in 2014.
Only six election-year declines greater than 5% since 1896: Presidential election years are the second best performing year of the four-year cycle. Incumbent parties lost power in five of these years. Five losses occurred at the end of the second term. FDR defeated Hoover in 1932 and was re-elected to an unprecedented third term as WWII ravaged Europe. Election year 2012 marks the end of the incumbent party's first term, improving the prospects for a solid year.

Year      Party Switch      Average % Dow Loss     End of 2nd Term
1920             X                           -32.9%                            X
1932             X                           -23.1%                 Market Crash 1st Term
1940        WWII 3rd term                     -12.7%                            X
1960             X                           -9.3%                              X
2000             X                           -6.2%                              X
2008             X                           -33.8%                            X

MrTopStep Closing Print Video: http://www.mrtopstep.com/29615/

Our view:
We have said it before and we will say it again. The first trading day of October has been down 4 out of the last 6 and Mutual Fund Monday has been down 9 out of the last 11 Mondays. It's also Golden Week in China. With 3bil in new liquidity we expect some type of bounce. Stats say today is bad, but there is going to be two-way buying and selling. Our view is to let the SPZ drop a little further and look for a spot to be a buyer. As always, keep an eye on the 10-handle rule and please use stops.

It's 6:00 a.m. and the ESZ is down 6 handles at 1428.25, crude is down 78 cents at 91.41 and the EC is trading 1.2909, up 47 ticks.
In Asia 6 out of 11 markets closed higher (Shanghai Comp. +1.45%, Hang Seng +0.38%).
In Europe 11 out of 12 markets are trading higher (CAC +1.42%, DAX +1.23%).
Today's headline: “European Stocks Rise, Euro Gains On Spanish Banks; Commodities Drop.”
Economic calendar: Today: PMI mfg index, ISM mfg, construction spending, Bernanke speaks, Kraft spin-off. TUESDAY: Monthly auto sales. WEDNESDAY: Weekly mortgage apps, ADP employment report, ISM non-mfg index, oil inventories, H-P analysts mtg; earnings from Family Dollar, Monsanto, Marriott.THURSDAY: Chain-store sales, Challenger job-cut report, jobless claims, factory orders, FOMC minutes.FRIDAY: Non-farm payrolls, consumer credit

VOLUME: 2mil ESZ and 10.6k SPZ traded
SPREADS: 55 SPU/Z spreads traded
FAIR VALUE: S&P +5.50, NASDAQ +14.00
2012 NET CHANGES YTD: DOW +9.89%, NASDAQ +19.62%, S&P 500 +14.56%, RUSSELL +13.03%, CBOE VIX -33.39%.

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In the early going the month/quarter end was a mixed bag. The DJT continued its downward trajectory, US dollar was firm, treasuries were choppy, gold consolidating, crude was dormant and AAPL was slipping as traders awaited the results of the Spanish bank stress tests. Mainstream media; the tests will reveal an aggregate capital hole in the EU60B range while Rajoy was expected to ask for EU40B from the EFSF. Late morning headline SPAIN RELEASES RESULTS OF BANKING STRESS TEST: BANKING SYSTEM NEEDS €59.3B UNDER STRESSED SCENARIO. BAM!!! All is good, at least through the midday. As those in the know waited for – The WalkAway Trade is still a force to be reckoned with. Scroll down, but take your time and check out the other interesting trading observations at http://www.mrtopstep.com/trading-101/ These guys got an early start; Italian unions strike against Monti, close Colosseum; up to 30,000 march to protest austerity cuts.

Wacky world of crude: Henry, is holding 92 today critical to crude…for the week, month, quarter…or is 90 then 87 more important?
Stanton Analytics: Brent: the important support for this pattern is 111.50 to 111.30. We favor the latter for the stronger support. The minor downside pivot is 111.10. For the week, if Nov is to recover more to the upside next week, it will need to hold the 90.00 area. 93.20 is the important upside pivot for the day. 94.50 to 94.65 will be a huge number next week. Note: Chatter about a hedge fund that was long heat and short rb in oct. That is why they call it the WidowMaker!

Morning observations: Since 1930, down 2H Septembers have been followed by positive Octobers. Since 1930, following a “down” September, October gains averaged +0.5%, ahead of the +0.1% for all Octobers. Returns have been even better when we consider years: (i) in a “bull” market; (ii) in an expansion (not recession); and (iii) in a Presidential election year and meeting the other two criteria, which resulted in a positive October 80% of the time with an average gain of 1%. Crude fluctuating near unch following the 10% break and nearly 2% pop. Cyrus

Morgan Stanley: The S&P will finish the 3rd quarter with gains in each of the three months within the quarter. in the “for what it's worth” category, that has only happened 13 times since 1928. Of those, the 4th quarter was an up quarter 12 times. The exception was a very modest 0.75% loss in 1940.
Economic data:
9/28 – France to publish '13 budget
9/28 – China HSBC manufacturing PMI (Fri night)
Sun 9/30 – China manufacturing PMI (Sun night)
10/1 – Eurozone PMI manufacturing (4am ET) and unemployment rate (4am CT)
10/1 – US manufacturing ISM and construction spen

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CONTRIBUTORS' CORNER

SPX CHARTS

Rich Chappell, Channels & Patterns

(9-28) SPX closed back above the daily middle bollinger band yesterday and that was unexpected and rare. Generally speaking on a cross significantly above or below the middle bollinger band on the SPX daily chart, there is then a move to the next primary support or resistance level, which is either the next bollinger band, or a major moving average (the 50, 100 or 200 DMA) lying between the middle and far bollinger band in the direction of the break. I can see about twenty instances of that happening in the last year, and a further ten or so when the middle bollinger band was good support or resistance for continuation.

For the current setup where there has been a clear break of the band and then a re break shortly afterwards without a hit of a primary target between, there are only three previous instances in the last year. All of these broke below the middle bollinger band and then back above, and two of those, both in an uptrend since the October 2011 low, then rose to hit either a key MA or the upper bollinger band. The one that didn't was in a downtrend before the October 2011 low. Statistically this close back above is therefore a bullish looking break with a target at the upper bollinger band, currently in the 1482 area, though this signal is weakened by the failure to hit SPX rising channel support at the low, with the 50 DMA in the same area as that support:

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DISCLAIMER: The information and data in the following report(s) were obtained from sources considered reliable. Opinions, market data, and recommendations are subject to change at any time. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any commodities or securities. MrTopStep, its officers, directors and its contributors may. in the normal course of business, have position(s) which may or may not agree with the opinions expressed in this report.

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