Stock Markets Analysis & Opinion

S&P 500: October Weakness Before the Year-End Run?



Add to/Remove from Watchlist

Add to Watchlist

Add Position

Position added successfully to:

Please name your holdings portfolio







Point Value:





Create New Watchlist

Create a new holdings portfolio

+ Add another position

While September has been a bit sloppy so far, will further weakness in October weigh on investor sentiment before the seasonally strong period begins?

As shown by the S&P 500 index seasonality chart below, weakness in the last two weeks of September and the first two weeks of October is common.

However, we must also understand that the big down move in the market during that period came from historical crashes such as the in 2008. Excluding those periods, the market still tends to be weak but more flat in nature.

S&P 500 Seasonality

Just as a reminder, the historical analysis suggests summer months of the market tend to be the weakest of the year. The mathematical statistics prove this as $10,000 invested in the market from November to April vastly outperformed the same amount invested from May through October.

Interestingly, the max drawdowns are significantly larger during the periods. Previous important dates of major market declines occurred in October 1929, 1987, and 2008. Growth of $10,000: Strong Vs. Weak Periods

So far this year, the May through October period remains about average, with a return through last Friday of 6.74%. Even if there is some additional weakness, the overall period should still be a for investors.

However, as noted, the weakness came a bit late this year, with a 5%ish correction starting in August.S&P 500 Daily Chart

However, this is a bit deceiving. As we noted previously, much of the gain in the market this year has come from essentially ten stocks that have the largest concentration, in terms of market capitalization, in the index.

The surge in those stocks has skewed the performance of the broad market index. The performance of the bottom 490 stocks remains markedly different. S&P 500 Equal Weight

Looking at the performance of the equal-weighted index from May to the present, we see the seasonal market weakness more clearly. While still positive, the return so far is about 200 basis points weaker. S&P 500 Equal Weight ETF Chart

So, as we begin to wrap up the seasonally weak period for stocks, what will potentially be the market drivers into year-end as the seasonally strong period begins?

Driving Ms. Daisy

Three primary drivers will likely drive markets from the middle of October through year-end.

The first is earnings season, which kicks off in two weeks. As is always the case, analysts have significantly lowered the heading into reporting season. As noted in this article, analysts are always wrong, and by a large degree.

The chart below shows the changes in Q3 earnings estimates from February 2022, when analysts provided their first estimates.Analyst Estimates Q3 2023

Of course, with the bar lowered, such will generate a high by companies, which will help fuel stock prices in the short term.

Notably, those get support from the more negative short-term sentiment and reduced equity allocations by professional managers during the summer.

As stocks start to move higher, professional managers will begin to chase performance, pushing prices higher. NAAIM Vs. S&P 500 Index

Given the large divergence between the market and equal-weighted indexes this year, there is additional pressure on managers to catch up with performance moving into year-end reporting.

Given the career risk to managers of significant underperformance, additional buying pressure could manifest. Lastly, corporate share buyback windows will reopen in November and December as companies exit their earnings

Notably, as shown in the table below, the last two months of the year represent the best two-month period of the year for corporate executions.

Such is because corporations have a clear picture of their current financial positions and can use stored cash to execute buybacks. As noted by Goldman Sachs:

Yes, that is $5 billion each trading day, which provides sufficient buying power to lift asset prices into year-end.

Don’t Forget About The Risks

A reasonable backdrop between the summer selloff, sentiment, positioning, and buybacks suggests a push higher by year-end.

Add to that the performance chase by portfolio managers as they buy stocks for year-end reporting purposes. As Goldman’s flow guru Scott Rubner points out:

While the backdrop certainly supports a rally into year-end, such is not guaranteed. However, the potential risk of elevated interest rates, slowing economic data, and tighter financial conditions should not be dismissed.

One of the things we continue to keep a very close watch on is the extremely suppressed level of market volatility. While the markets are indeed acting bullishly, extremely low levels of volatility are a warning. As shown below, previous periods of low volatility eventually led to periods of higher volatility.

S&P 500 Vs. VIX

While such low levels of volatility can certainly last longer than many expect, it is inevitable that, eventually, we will have a reversal. When that will happen, or what will cause it, is always unknown, but such a reversal is almost assured.

For now, an ongoing bullish bias continues to support the market near-term. Bull markets built on are very hard to kill. Warning signs can last longer than logic would predict. The risk comes when investors begin to the warnings and assume they are wrong by suggesting

There is little to lose by paying attention to

If warning signs prove incorrect, removing hedges and reallocating into equity risk is simple.

However, if warning signs come to fruition, a more conservative stance in portfolios will protect capital in the short term. Reducing volatility allows for a logical approach to making further adjustments as the correction becomes more apparent.

It also allows you the opportunity to follow the


Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button