Its October, Time to Take the Money and Run?

October 14, 2017

This week, most key US Equities indexes hit new highs again, with the Dow industrials leading +.52 %.   This upcoming week marks the 30-year anniversary of the great market meltdown or the crash of 1987.

October, although generally a good month for stock market returns, also hosts the biggest market selloffs including the great crash of 1929. Borrowing a quote form Henry Wadsworth Longfellow “and when she is good she is very, very good; but when she is bad she is horrid.”

Students of market history are asking themselves, is this setting up to be a repeat?  One might start by asking about similarities, assuming you believe history tends to repeat. So here is my walk down memory lane as I run down a brief checklist of data points.

I remember October 19,1987 vividly as it was one of the best trading days I ever had. I had come in long volatility on many futures contracts which was mispriced across the board relative to underlying price action. Some of that reasoning was based on Ray Dalio and Bridgewater’s (we had some common office space back then) daily reports that were negative for months regarding the US equities.

His thoughts back in 1987 (dead on and way ahead of the curve), were based on the accelerating rise in interest rates to 10%. Currently on that score, although we do have a Fed that has slightly raised rates, they are still virtually zero, so no rush to sell equities to lock in a great safe return.  We can take high rates off the list as a factor for a market selloff.

Also, in those days, there were things called selloffs and they were common. This was well before the PPT (the Plunge Protection Team) was formed. Central banks and sovereign wealth funds did not buy stocks.as standard policy.

Back in the day, a weak close on Friday, especially when the markets were already trading beneath key moving averages meant follow-thru. The question was how much, how fast and how long it would last. Monday morning follow-thru. In 1987, Friday’s close (October 16) was terrible.

Therefore, you can take the current chart pattern off the list. We are above the key moving averages and closed mostly positive on Friday.

Next item on the list is stupid stuff said by key players in finance as a catalyst. Back in 1987, on October 18, our Treasury Secretary James Baker threatened Germany with a currency war after they jacked up their rates. This was after newly appointed Fed Chairman Greenspan had already raised our discount rate .5 % in September to counter inflation, thus driving long term rates to almost 10%. by October.

Treasury Secretary Baker was not thrilled that the Germans raised their rates faster than he thought prudent, jeopardizing the wonderful 30% YTD rise in US stocks. In those days, people were concerned with debt levels and trade deficits.  Ours was growing fast, with Germany and a falling dollar an added negative.

Trump has not been shy about confronting China on numerous trade issues including currency manipulation. So even though it is not a primary focus right now, it could rear its head on short notice. You can put that down to a list of concerns. But for the moment, only a backburner.

Additionally, on my checklist is market psychology, geo-politics and how that is impacted by what people say especially by those in power.  So, without entering the political fracas, Trump’s tweets regarding North Korea and Iran are provocative to say the least, making those wild cards. Any nuclear exchange would certainly unhinge the markets and it can happen on a moment’s notice.

However, looking at the market action, the countries in the crosshairs are South Korea (EWY) Taiwan (EWT) and (EWJ). All of them were up big this week and either hit new yearly highs or approached all-time highs.  In fact, South Korea is the leading Asian stock market is up almost +24% over the past six months and +3.7% this week alone. So, turn off twitter, the talking heads on the news, and let the tape talk.

To sum it up, there are more factors, but the ones mentioned are the big ones and it seems we have a small chance of an October surprise based on current market action. The volatility of the players watching the tape is even more critical.

There are a few other things to note:

  • The Dow has the strongest momentum of US Equities
  • Solar and Semiconductors are on fire
  • Volume patterns show institutional buying
  • Emerging markets are leading and some commodities look poised to run
  • Bitcoin hit new highs
  • Stock Volatility is at historically low levels

Now with the above in place there are some serious inconsistencies and deterioration in some key intermarket ratios that we cover in this week’s video