Originally posted at Briefing.com
October has a reputation for being a scary month and not just because of Halloween. Its reputation has been forged from some scary moments in stock market history that took place in the month of October, namely two stock market crashes in 1929 and 1987. This October was scary, too, only it was scary good with the S&P 500 increasing 8.3% and the Nasdaq 100 soaring 11.2%.
Casper Comes Calling
The major indices came storming back from a lousy month in September, riding a policy rate bandwagon that got increasingly crowded with some spooky, if not altogether scary, economic data.
The biggest ghost of all was the September employment report. It was released on Friday, October 2. It put a scare into everyone, because it was surprising how weak it was. The initial takeaway was that it was bad for the economy and earnings prospects, ergo it was bad for the stock market.
Stocks dropped sharply that first Friday in October, but by the end of that first Friday in October they were up sharply.
The scary ghost seen at the start of trading had been transformed into Casper the Friendly Ghost by the end of trading since the data at the time pretty much squashed the notion that the Federal Reserve would be raising the target range for the federal funds rate in December.
The intraday swing from low to high for the S&P 500 on October 2 was 58 points, or 3.0%, and from there the market didn't scare easily.
There was more disappointing data; the third quarter earnings news was better than expected but not good; fourth quarter guidance was disappointing overall; and there was the specter of the US government hitting the debt ceiling without an agreement to raise it.
There were goblins all around, yet the market held tight to its central bank security blanket.
The European Central Bank held its hand with the hint of added policy stimulus by the end of the year; the People's Bank of China gave a comforting hug with an actual rate cut and a reduction in its required reserve ratio; the Bank of Japan didn't do anything at its policy meeting, but it pledged it was ready to do more if necessary; and the Federal Reserve basically provided some security with a directive that implied it would keep rates at the zero bound if necessary and raise them only if it was feeling confident the economy was progressing toward meeting the Fed's dual mandate.
Fed a New Line
The interesting thing about the Fed's perspective is that it was embraced by the market as offering the best of both worlds. Rates either stay at the zero bound or they go up because the economy is improving, which means earnings prospects should be improving.
That liberating train of thought we suspect was helped along by the market action preceding the Fed's directive.
When the directive was released on October 28, the S&P 500 was up 7.6% for the month. We highly doubt market participants would have been so willing to embrace the Fed's recovery/rate hike perspective if the S&P 500 had been down 7.6% for the month at that point.
Instead it would have been frightened out of its boots by the thought that the Fed was still leaning toward raising its policy rate before the end of the year despite a recurrence of less-than-glowing economic data. Alas, investor sentiment was in a good place when that hypnotic directive hit and the view was such that, if the Fed said things are still looking okay to possibly raise rates in December, then the Fed would be taken at its encouraging word.
That perspective, as everyone should know by now, is subject to change, particularly if the overbought stock market starts to peel back in November and Fed officials still talk tough as incoming data fails to support the tightening case.
What It All Means
With the latter in mind, one should be aware that the rally in October had better form at the beginning of the month than it did at the end of the month. The charts below compare the performance of the S&P 500 and Nasdaq 100 price indexes with their equal-weighted counterparts.
The S&P 500 and Nasdaq 100 are both market-capitalization weighted indexes, meaning companies with larger market capitalizations have more influence in driving the indexes than companies with lower market capitalizations. An equal-weighted index negates that distinction and weights all stocks the same.
Note how the price index and equal-weighted index were closely aligned at the beginning of the month and really through the first three weeks of the month. The last part of the month, though, showed a widening gap between the two, demonstrating that the gains at the end of the month were being driven by fewer stocks (i.e. the big guys).
That includes the likes of Alphabet (GOOG), Amazon.com (AMZN), Apple (AAPL), Facebook (FB), and Microsoft (MSFT), all of which, except Facebook, got a big boost after reporting their September quarter results. Facebook went along for the ride because it was presumed it would soon share good news too. Facebook reports after the close on November 4.
What the widening gap suggests is that the scary good October rally went from a distinctly broad rally early in the month to a noticeably narrower rally by the end of the month.
It's possible the underlings could pick up some steam, but if the big guys lose their mojo, that will be a challenging proposition and most likely an invitation to scare some of the scary good October rally out of the market in the near term.
