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Will October be a Bear-Killer?

The October effect tends to evoke fear on Wall Street due to the previous stock market crashes and selloffs during the month. However, from a seasonality perspective, October is also known as a bear market killer and the start of the seasonality strength period.


Historically, October tends to be a month for turnarounds in stocks. It is when investors and traders buy stocks, specifically toward the later part of the month when technology and small-cap shares fall to their respective lows.


October has been a turnaround month for stocks, reversing the trends of thirteen (13) post-WWII bear market declines, including 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002, 2011, and recently 2022 (SPX declined 27.54% from 1/4/22 to 10/13/22).


Dow Jones Industrial Average (INDU) also found a bottom on 10/13/22, declining 22.44%. The technology-heavy Nasdaq Composite Index (COMPQ) reached a low on 10/13/22, suffering a devastating 37.77% drop.


Although the October effect refers to stock crashes during October, it is more of a psychological expectation than an actual occurrence. Overall, October tends to be a winning month for stocks.


In the past twenty (20) years, SPX, INDU, COMPQ, NDX, and other market indexes tend to rise, on average, during October. For instance, SPX closed higher than it opened the month of October around 60% of the time and has averaged gains of 0.9% for October. INDU closed the month higher 60% of the time and averaged returns of 1.2%. COMPQ and NDX closed in October 60% higher, with average returns of 1.1% and 1.6%, respectively.


While we are not officially in bear market territories this year, stocks have suffered another seasonal selloff. SPX has fallen 479.17 points from the 7/27/23 high (4,607.07) or -10.40%. INDU also fell 2,935.14 points from 8/1/23 high (35,679.13) or -8.23%. COMPQ declined 1,902.69 from the 7/19/23 high (14,446.55) or -13.17%. NDX also fell 1,873.72 points from the 7/19/23 high (15,932.05) or -11.76%.


Will the summer-to-fall selloff lead to another October 2023 bottom?


Or is this the start of a bear market decline?


Will the October market weakness lead to selling exhaustion and another buying opportunity, especially for volatile technology and small-to-mid-cap shares?


With a few days before the end of October, SPX has declined -3.19% for the month. INDU fell -2.48%, COMPQ -3.58%, and NDX -3.00%. Except for INDU, popular U.S. stock market indexes are trading at correction territories (-10% or more).


SPX continues to deteriorate as it has violated several key supports, including the Oct 2022 primary uptrend (now at 4,349), the pivotal 200-day ma (4,239.51), and the previous May 2023 breakout (4,195.44). The selloff has created another oversold condition (RSI = 30.42).


Where can SPX find a bottom?


The next SPX support is 4,113, corresponding to the 61.8% retracement from the July 2023 rally. Failure to maintain support signals a drop toward crucial intermediate-term support at 4,048-4,049/3,918, coinciding with the Apr/May 2023 lows, the Jun 2023 head/shoulders top measured downside projection, and the 50-61.8% retracements from the Oct 2022-Jul 2023 rally.


If VIX trades into the mid-to-high 20s) SPX can revisit 3,764.5-3,810 (May/Dec 2022 and Mar 2023 reaction lows, the Oct 2022 highs, and the Oct 2022 uptrend channel breakdown target).


Under extreme selling, SPX can retrace 100% of its Oct 2022 to Jul 2023 move and retest 3,491.58 (10/13/22 reaction low).


Initial resistance falls to 4,195-4,239.5 (May 2023 breakout and 200-day ma) and above 4,349-4,401 (extension of the Oct 2022 channel breakdown, the 50-day ma, 10/17/23 high, and 9/21/23 gap-down), and 4,448.5-4,458 (Jun 2023 highs and Jul 2023 downtrend).


Source: Chart courtesy of StockCharts.com


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