By late August we were of the opinion that bearish tendencies would play out and that equities markets would see negative returns in September. We cited seasonality, momentum and price pattern interpretations as evidence for our stance.
Our negative outlook for September proved accurate, as stocks of virtually all stripes declined last month. All five of the broad geographies we monitor submitted losses in September, and only one of the ten GICS global equity sectors managed even modest gains.
Looking ahead to October, the short-term picture has changed, and equity market gains for the month look to be the highest probability outcome. In support of this perspective, we cite, foremost, the momentum backdrop. Hourly momentum for the S&P 500 bottomed last Thursday — from south of two standard deviations below average (a fairly rare extreme). Interestingly, the low water mark for hourly momentum that attended the August price low likewise arrived a few days ahead of the actual bottom in prices.
Further, daily momentum for the broad equities market appears slated to bottom on Thursday, October 9. This signal is validated by momentum readings for individual equity sectors. As is illustrated below, seven of the ten MSCI ACWI sectors are expected to bottom Thursday. The last time momentum for a majority of global equity sectors bottomed in tandem was at the nadir of the July/August sell-off.
Next, per data from Investors Intelligence, in 2014 spikes in weekly selling climaxes to > 80 have tended to mark short-term equity market price lows. Last week saw 84 selling climaxes.
[Per Investors Intelligence, a selling climax occurs when a stock makes a new 52-week low during the week, but closes higher than the previous week’s close. They cite that buyers of selling climaxes and sellers of buying climaxes are profitable 80% of the time over the next four months or so.]
And finally, Jason Goepfert, of Sundial Capital Research, reminds us that historically, when his Stock/Bonds Ratio (pictured below) has climbed from below to above -2, while the S&P 500 traded above its 200-day moving average, the index saw month-ahead price gains every single time (he notes ten instances of this phenomenon). The average one-month forward return after this signal is triggered is +2.80%.
[Goepfert’s Stock/Bonds Ratio is an oscillating measure of the relationship between the S&P 500 Index and the 10-year Treasury bond yield.]
Given the confluence of bullish indications we have observed recently, we anticipate that the S&P 500, and other global bourses, are poised to move higher in days/weeks ahead.