The leaps made by the stock market indices Dow Jones (DJI), S&P 500 (S&P), Nasdaq Composite (NASDAQ) and Russell 2000 (RUT) on October 15 and 16, seems more like technical reactions due their fall to the 200 day moving average (MA) than signs of recovery.
Benchmarks fell at a mean of 8.60% from their recent all-time highs (RUT, -11.26%; NASDAQ, 9.60; S&P, -6.93%; DJI, 6.62%). RUT continued dropping 4.7% beyond that MA, was the only index that touched and trespassed the MA 300 line and, in proportion, the third in rebound magnitude. What could we understand and wait?
It is October, guys, and you cannot get enthused. Since we have well clear the reasons for the downfall –overprices, continuing hikes of fed funds rate, uncertainty about Brexit, economic and political storm-clouds over the EU, trade menaces, etc. –, and assimilated enough that they will not be resolved neither in the short nor in the medium term, even with the palliative of quarterly reports, it is hard to accept that the increases of those days mean a quick return to historical highs. Technical indicators suggest there are room for additional downs, given the indices didn´t reach the over-sale area. Rebounds could be taken as a breath in the downfall or as a symptom of stagnation.
Judging by the cumulative returns in five, three, one year (from closing to closing of each September) and YTD, it is reckoned understandable that a profit taking, more substantial than previous ones, was intuited or drawn for months. Take a look to these rounded figures:
Historical lessons of October
MexBol IPC index flirted the threshold of 50,000 points in August and September and finally fell in this streak somewhat less than Wall Street references. Therefore, its positive reaction has been tepid, precisely up to the 200 MA line, without shaking the bearish bias. Still, it has left in two weeks half of the points it had won in four months. Needless to say, its performance has been poor: loss of 1% in one year; gain of 1% YTD.
If we review the behavior of the stock markets in others cycles of FED Funds rate increases, we would see that the pattern of the turn to the upside requires not less than a semester. On this occasion, it would be warned: as long as the results contribute and the other elements do not run aground. Of course, the pattern involves rises and relapses that, this time, if occurred, they would coincide with the crossing from and to the 300 MA, which could be bad for many but interesting for some. If we abide by technical signals, we will assume that this PM marks a harder and decisive floor for Wall Street: if reached and validated, the rebound could inject confidence; if breaks, be careful…
In any case, if the decrease becomes pronounced or laterality happens, the histories of October and the stepped rise of Fed Funds rates would allow to deflate prices and enter the market at attractive levels. Here lies the interesting thing.
Column by Arturo Rueda