WHY OCTOBER ISN'T A GOOD TIME TO SELL -- SO MANY BOTTOMS HAVE FORMED DURING OCTOBER THAT IT'S KNOWN AS A BEAR KILLER -- MARKET HITS NEW LOW TODAY AS HOUSE PASSES BAILOUT PLAN
SELLING SHOULD HAVE BEEN DONE MONTHS AGO... Over the past couple of weeks, I've suggested taking no new action in the stock market. Part of my reasoning is that we've been recommending a bearish strategy for the past year and see no reason to change that. Selling should have been done earlier in the year when major sell signals were first reported here. My January 3 Market Message reported on the major sell signal given by the monthly MACD lines last December (Chart 1). A number of other technical indicators also give major sell signals at the start of the year that we reported on. None of those sell signals have been reversed and we've made several bearish recommendations since then. I realize that there are opportunities for short-term traders. My main focus, however, remains on intermediate and major trends. Since there's little justication for buying, the main question is whether we should be doing more selling at the moment. Here's why I don't think October is a good time to sell.
Chart 1
OCTOBER IS A BEAR KILLER ... According to the Stock Traders Almanac (which is the authority on seasonal trends), October crashes took place during 1929 and 1987. October downturns also took place in 1978, 1979, 1989, and 1997. October, however, is also known as a "bear killer". Bear markets ended during October in 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, and 2002. Charts 2, 3, and 4 show October bottoms in 1987, 1998, and 2002. October also saw big gains after bad Septembers in the five years from 1999-2003. The Almanac also reminds us that the worst six month period of the year starting in May ends in October. That was why I suggested yesterday that Octobers often start bad but end better. The record suggests that October is one of the worst months to sell.
Chart 2
Chart 3
Chart 4
BEST MONTHS TO SELL ... According to the Almanac, the weakest period of the year is August through September (and sometimes early October). The strongest period is November through January. One of the rules of thumb I like to use is that it's better to buy in the autumn (after the market has bottomed) and sell in January. Some other strong months that are good for selling are April and July. October usually isn't a good month for selling (unless it's the start of a new bear market as was the case last year). If you aren't interested in buying, then it's probably better to do nothing new for the time being. Which is what I suggested last week. Yesterday, I showed the 13-34 daily EMA combination still in a downtrend. One of our readers asked how to construct the spread between them below Chart 5. You can do that by inserting the 13,34,1 values into the MACD indicator. The falling black line tells us that the trend is still weakening. The last signal given was a sell at the start of June (see arrow) when the black (spread) line fell below the zero line. You can construct the same indicator on weekly and monthy charts. Their lines are also pointing down.
Chart 5
BAILOUT PACKAGE DOESN'T HELP MUCH ... Even today's House passage of the bailout plan wasn't able to support the stock market. Apparently, there are too many other bearish factors (like the freezing up of global credit and the worst jobs report in five years) to worry about. The next three hourly charts show the recent trading pattern which is still down for the Dow Diamonds, the S&P 500 SPDRS, and the PowerShares QQQ Trust. All three ETFs hit new lows today. What's especially discouraging is that today's losses came on heavier volume. To signal any kind of a bottom, the three ETFs would have to exceed this week's highs at 108.79 in the DIA, 116.80 in the SPY, and 39.30 in the QQQQ. Let's hope October lives up to its reputation of ending better than it's starting.
Chart 6
Chart 7
Chart 8
