Here are a few notes on my mid-October market scorecard.
— After rising almost 1% last week, the S&P 500 is now up nearly 8% since the Sept. 29 low. During this period, large-caps have out-performed while small-caps and mid-caps are lagging by two percentage points. Indeed, mids and smalls finished in the red last week. This is not typical of risk-on rallies, which are typically led by small-caps.
— Bespoke Investment Group analysts noted in late September that the S&P 500 chart in 2015 was closely following its dance steps of 2011. You may recall that 2011 was flattish until a collapse in August. The market that year made another low at the end of September, then reversed and rallied the rest of the year. Bespoke updated the chart above, and you can see the similarities are remarkable. (The market still finished flat in 2011, for what it’s worth).
— As long as we’re on the subject of historical results, Bespoke also looked at prior Octobers since 1928 when the S&P 500 had gained more than 3% in the first 12 trading days of October. The table of results is shown above. For the remainder of months with strong starts, their research discovered the S&P 500 has averaged a gain of 0.51% with positive returns 59% of the time. That’s better than the average decline of 0.09% that the S&P 500 has experienced for the remainder of all Octobers going back to 1928 at this point in the month, according to Bespoke.
For the remainder of the year, the returns following strong starts to October are nearly the exact same as they are for all years. However, since 1975 in the 11 instances when the index has been up 3%+ at this point in October, the market benchmark has been up for the remainder of the year every single time.
— On Wall Street there has been a rotation in the past six weeks from health care to energy, materials and tech. Around the world, the rotation has been into emerging markets (EEM), led by China (FXI) and Russia (RSX). As you can see in the chart above, since the late August lows, the emerging markets are up a little more than twice as much as the S&P 500 and more than three times better than Europe (IEV).
It’s kind of a surprise, but the emerging markets fund appears to have broken its eight-month bear market and may well be starting a new bull cycle.
— In its U.S. Portfolio Strategy report out on Friday, JPMorgan analysts noted that they believe that the broader equity bull cycle remains intact. They believe the market can grind higher on an easing of macroeconomic headwinds, housing recovery traction, a resilient U.S. consumer and strong credit growth. It added that short covering could also potentially provide additional support. It estimated that short sellers would have to cover around $90 billion in equities to restore total short interest to pre-August levels! The firm pointed out that contrary to views that the recent rally was driven by sustained short covering, it has not found supporting evidence. It said that it expects short interest to rise and not decline in the first half of October.
Anxious Over Analogs
The move to a new post-panic high for the S&P 500 makes it a good time to check in with Jason Goepfert of SentimenTrader.com and see how the chart matches up with the analogs shown last month. A few times since the mini-crash in late August, he has helped us look at the times in history that approximated the price structure leading up to and immediately following the sell-off.
Analogs like this have many weaknesses, he notes, but it does provide a rough guideline to how investors have behaved in the past. The charts below, created by Goepfert, show eight periods since 1928 that have the highest correlation to the price structure in the S&P 500 in the months leading up to the August crash and its performance in the weeks since then.
They are ordered from highest to lowest correlation (left to right, top to bottom). The closest analog is from February 1934 and the second-closest is from November 1983. Curiously, Goepfert notes, as the S&P 500 has strengthened over the past two weeks, the analogs have gotten tighter and uglier. That is, the ones that are becoming more and more correlated to our current structure are mostly the ones that had difficulty maintaining the rally.
Goepfert notes that analogs should be only a minor consideration in your thinking and planning, but they are troubling nonetheless.