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October isn't being kind

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Stocks tumbled on Wednesday as the ISM report seems to have shifted the momentum to the downside, or at least taken to a new levels since stocks were already wobbling in the second half of September. October has a reputation of being wild and so far it has lived up to that. The near 500-point loss in the Dow is a sharp one, but at -1.86%, certainly not too unusual if you've been in the market a while. However, the question always is, what's next? More pain or a buying opportunity?

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The small caps held up a little better yesterday for a change and it may have just been a case of the large caps catching up to the bigger losses that the small caps have had recently. Either that or investors are finding more value in them and are not willing to sell this low.

After the bell it was announced that there will be new tariffs imposed on the European Union effective October 18, and that caused a little more volatility in after hours trading.

The talk on The Street is that this is a bit of a pile on considering what has been going on with trade, economic data, and the impeachment inquiry, but when you think about it, stocks are only 5% off their all-time highs. Maybe it's better to get all of this chaos out of the way now. If stocks were down 20% off their highs, like we saw last December, it may have been a tougher pill to swallow, but 5%, or even 10% corrections, are routine on Wall Street. Or at least they used to be.

Over the last decade since the financial crisis we have seen fewer 10% declines, but that was most certainly because interest rates were at 0% for much of that time. When interest rates rise we would expect volatility to increase, but the Fed is now cutting again so these kind of declines "should" be giving us good buying opportunities, if you're in cash, or less downside risk if you are in already stocks.

It's October and as we've talked about the month having a decent record overall, but it can be very volatile which can set up good trading opportunities. I have personally been waiting, or maybe hoping is a better word, that the recent warnings signs like double tops and breaches below key moving averages in the charts, were setting us up for a decline that will give us a good opportunity to buy. I'm not sure if -5% is at that point, but waiting for -10% or more could be asking too much.

It won't feel good if you're losing money now, but we talked about being nimble in this environment, and until the dust settles you may have to use more of a hit and run approach. Or, if we get one of those major declines of 10% or more, than buying with the intent of catching a 4th quarter rally later would seem prudent. Maybe you don't catch the lows, but as we saw in January of this year, the rallies off the lows can be dramatic, and easy to miss. I know from personal experience. My patience didn't pay off in the first quarter when stocks exploded off the lows for about 4 months before we saw a decent pullback.

Obviously if you're over 50 years old you might approach this differently than if you're 30. But you have to decide what a 10% correction means to you. Is that a buying opportunity or a devastating loss for your account? It may be upon us so you may what to start thinking about how you want to play it. But at 5% down from the all-time highs right now... that's nothing in the grand scheme of market volatility. We just have to get past the noise, and my guess is that we'll get a good opportunity this month, and at the end of the year any lows made in October will be the lows before a November / December rally. I don't want to make that a "call" since I trade day by day and things could easily change, but that's how I see it today.

Also, I have a feeling that the chaos in Washington is going to move to a new level in the coming months. The question is going to be whether the stock market cares about each punch / counter punch between our politicians, or if it eventually stops caring. The trade war(s) is a different story. I'm talking about the political side.

There is an FOMC meeting at the end of the months (30th) and there was not a whole lot of expectations for a cut at this meeting (53% a week ago), but that has changed this week as the chances of a cut in the futures market are now at 77%.

We'll get the September jobs report on Friday. Estimates are looking for a gain of about 150,000 jobs, and an unemployment rate of 3.7%.



The S&P 500 (C-fund) took another 1.8% haircut, gapping down to keep the ISM triggered selling going for another day. It hasn't been all that symmetrical, but we have some possible bearish looking head and shoulders patterns, which could have some dramatically low target levels if we do get some kind of breakdown below those dashed red support lines.




A closer look shows that the 200-day EMA was tested yesterday, held, and got a bit of a bounce. That's a good sign as we saw in August, but that doesn't mean subsequent tests will hold. For now it's just a short-term good sign, and we could see a little relief in the coming days. All of the open gaps that we had been watching are now filled on the downside, and the only open gap is now overhead up near 2940.




The S-fund has is back below the 200-day EMA and testing the August lows - so far successfully, but it's just test #1. There's also some rising support that held on a closing basis after an intraday break. The fact that this chart has made a lower high increases the chances that it can make a lower low, so 1340 is a key level that needs to hold, or 1310 would be the next target on the downside.




The EFA (I-fund) lost 2% on the day, fell below its 50 and 200-day EMAs, and like the S&P 500 earlier, its bull flag broke to the downside - something we were concerned about in yesterday's commentary. Two open gaps were filled on the downside yesterday, with another downside gap still open (and another down by 61.75 that is not marked.) A large gap has now been opened on the upside at Tuesday's lows.




The Dow Transportation Index got a decent bounce off the lows after nearly testing the double bottom lows from June and August. That's quite a large trading range. The question is whether that lower end can hold again. Being a market leader, what happens here may be key to the S&P 500.




The Volatility Index continued to rally above that bullish looking flag. It also filled the gap and reversed off the highs, so there could be some short-term relief for stocks, although the momentum is certainly down now, and with the VIX above the 200-day EMA, relief rallies in stocks become more vulnerable.




AGG (bonds) was up slightly on the day. It filled the overhead open gap and ran into that rising resistance line, but it's now at the top of that range so we'll see if it wants to pause or pullback for a bit here.




Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php

Thanks for reading. We'll see you back here tomorrow.

Tom Crowley


Posted daily at www.tsptalk.com/comments.php

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SPY (C Fund) (delayed)

(Stockcharts.com Real-time)
DWCPF (S Fund) (delayed)

(Stockcharts.com Real-time)
EFA (I Fund) (delayed)

(Stockcharts.com Real-time)
AGG (F Fund) (delayed)

(Stockcharts.com Real-time)