October: Bulls and Bears

Throughout October, our market cycle assessment registered between 70% and 80% bullish, with the most recent reading on October 28th clocking in at 75.4% bullish and 24.6% bearish, based on 43 bullish indicators compared to 14 bearish ones.

With this strong market cycle reading, we hold concerns that the market may be too bullish and could be poised for a pullback in the near term. This concern began to materialize in the latter half of October, as the S&P 500 has taken a breather since the most recent all time high on October 18th. 

As we look ahead, we anticipate some additional volatility ahead of the upcoming U.S. presidential election, alongside a Federal Reserve meeting and regular economic data releases. Historically, the outcome of elections tends to only have short lived implications for markets, often leaving long-term economic conditions largely unchanged—especially in a context where Congress remains gridlocked and neither party is able to legislate major changes.

Nonetheless, we expect 2024 to conclude on a positive note for U.S. equities, given current technical and macroeconomic data. With the S&P 500 up around 20% year-to-date, it would require substantial bearish macroeconomic factors to reverse these gains. 

All-Time Highs

The S&P 500 hit new all-time highs in mid-October, breaking above the 5,800 mark for the first time. Despite concerns about a potential pullback before year-end, the market has maintained strong momentum, with multiple record highs since the brief sell-off in early September.

Interest Rates

Although many long-term rates rose in October, we see the Fed’s accommodative policy actions as a positive force for market conditions. With 1-2 more rate cuts anticipated by year-end, the Fed’s policy could provide additional support for equities.

Inflation

Inflation remains stable and is approaching the Fed’s 2% target. As inflation stabilizes further in the coming months, this trend is viewed as a positive factor for the U.S. stock market.

Seasonality

As we head into November, presidential election months have averaged a 1.15% return, with a median return of 3.03% since 1988. Although November can bring heightened volatility, the market typically turns optimistic once election results are confirmed.

Point and Figure Charts

October saw an increase in bearish signals in the S&P 500’s point and figure charting, hinting at a potential near-term top in large-cap U.S. stocks. This trend could indicate a bearish outlook for equities over the next few weeks.

Options Activity

A recent increase in put-call ratios suggests an uptick in bearish sentiment in the derivatives market. This negative indicator reflects cautious views among active traders regarding near-term market conditions.

Mean Reversion

Technical indicators, including the Hurst ratio on the S&P 500, show signs that the current positive momentum may be trending down to the index’s mean reversion level, hinting at a potential downtick.

Summary

October was a mixed month for markets, but our market cycle assessment remained bullish, clocking in at 75.4%. Despite this bullish reading, we maintain concerns that the market may be cooling from a bullish run. The S&P 500 achieved new all-time highs, breaking above the 5,800 mark, driven by earnings growth, particularly in the technology and healthcare sectors, with 78% of reporting companies exceeding earnings expectations so far, despite some individual companies missing the mark. Inflation showed signs of stabilization, with the Consumer Price Index for September dropping to an annual rate of 2.4%.

Long term interest rates rose in the month, despite the Federal Reserve cutting rates in September, as better than expected economic data and fiscal deficit concerns affected rates.  With increased volatility anticipated leading up to the U.S. presidential election, historical trends suggest potential short-term fluctuations for stocks, but overall, tends to show resilience, positioning for a positive close to the year despite some mixed indicators.

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