October in New England: Colors, Red Sox, Tom Brady...Wait, what?
October. There’s nothing better than October in New England. It’s the same every year. The foliage turns beautiful with its fabulous colors...and we get to watch the Red Sox play in the MLB playoffs...and watch Tom Brady lead the Patriots into the meat of another winning season. Uhhhhhhhhhh...well at least the colors should be great again!!!
September corrections usually bottom in October.
As we’ve been saying (and showing) ad nauseam recently, October is also the month where the stock market tends to see a significant bottom...when it is followed by a rough September (like we just the one we just experienced). In other words, even though September can frequently be a rough month for the stock market, we usually need to see more downside follow-through before we seen an ultimate bottom. However, it is not out of the question that for the first time since 1986, the lows for a September swoon will actually come within that month...and not in October. So what will it take for the market to rally further current levels...and not make a lower-low like it usually does in October (in those years when September is weak)???
Well, the first thing we’re going to have to see is a new fiscal deal out of Washington DC. We’re hearing a lot of hope out of Speaker Pelosi and Secretary Mnuchin that a deal will get done, but we wonder if this chatter is merely something to drown-out all of the layoff announcements we’ve heard this week out of companies like Disney, Royal Dutch, Continental, Goldman Sachs (and probably American and United Airlines) during this election cycle. If it is...and we get no agreement...a lower-low is VERY likely. In fact, it’s not a lock that a new fiscal program will be big enough to overcome all of these layoffs (which will only grow as we move through the 4th quarter)...and a second wave of the pandemic.
The chip stocks are a great leading indictor...and they're rising.
One group that we’ll be watching VERY closely to see if the stock market can indeed avoid another (usual) down-draft in October is the one we highlighted late last week and in our weekend piece last weekend: the chip stocks. Late last week, the SMH semiconductor ETF was down near the bottom end of the sideways range it had been in for three weeks, but it has bounced very nicely this week. Its 5% bounce over the first three days of the week already has the SMH testing the top-end of that range. So if it can rally further over the coming days, it’s going to be bullish for this group. That said, we’d still need it to break above its early September highs of $183.50 to confirm the worst is behind us in the chip stocks, but there is no question that the action in the semis this week is a positive development.
As we’ve highlighted (and shown) many, many times in the past, the semis have been a key leading indicator for the broad market, so if this group can keep rallying as we move into October, it’s going to be bullish for the broad market as well.
On the other side of the bull/bear ledger, we’re starting to see some cracks in different key group in the market place...the truckers. We got some good news yesterday on the economy yesterday...with better than expected data on new home sales and a much better number on the Chicago PMI. However, we also got some negative news on the employment front...with the above-mentioned (big) layoff announcements by Disney, Continental, and Royal Dutch (over 50k among the three companies)...and the airlines. In other words, tomorrow’s employment report will be a backward looking number...and if there are a lot of layoffs coming as we move into the 4th quarter and the holiday selling season...tomorrow’s report might be dead on arrival even if it’s a good one.
The reason we’re pointing out the divergence between these announcements this morning is because we’re seeing some weakness in the truckers...which is a very important economically sensitive group. We do admit that this action is not a major concern yet. Yes, the group has been falling since the beginning of September, but its decline had not been any worse than the rest of the stock market. In fact, until recently, it was holding up better than the broad indices. It was also a nice outperformer in the rally off the March lows. (The Dow Jones Wilshire U.S. Trucking Index rallied 75% from March until the early September highs...vs. a 60% jump in the S&P 500.) Therefore, the fact that the truckers are seeing some further weakness this week is not the end of the world. It might simply be working-off some more of its overbought condition...after such a powerful 5-6 month rise into the August highs. (First chart below)
However the truckers are also a great leading indictor...and they're falling.
HOWEVER, we do need to point out that this truck-stock index has fallen well below its trend-line from March...and has been making a series of minor “lower-highs/lower-lows” over the past few weeks. It is now close to making another “lower-low,” so the truckers are starting to get our attention. We’d also note that one of the key stocks in this index, JB Hunt (JBHT), fell over 2% yesterday and has fallen below its trend-line from March as well. It is also testing its July 31 lows, so it is very close to making a more important “lower-low.” Therefore, if JBHT does not bounce back quickly, it is going to confirm that it is seeing a change in trend...which won’t be good for the entire group.
Again, we don’t want to get ahead of ourselves, but it’s important to note that the truckers began to decline about a month before the rest of the stock market in the first quarter...when the group began to roll-over in mid-January. Therefore, if we see more weakness in this economically sensitive group as we move into October, it could very well be a bearish leading indicator once again. The truckers are not a group that people tend to focus on, but given its action in 2020, it’s definitely one everybody SHOULD be watching very closely. Thus we will definitely be keeping a very close eye on it. (2nd & 3rd charts below)
What we’re saying is that October is a month where the same thing tends to a happen over and over again. However, as we said at the outset, even though the colors will change again this October, there ARE some ways that October will be much different in New England this year. The question is, will we see a change in the usual activity in the stock market during October as well (like it has been with our sports teams in New England)...or will we see the same thing we always do (like it will be with the foliage)? We believe that the market will be like the foliage...and that we’ll see lower-lows before long. However, we’ll be watching the semis and the truckers very closely...so that we can determine whether we’re right or wrong very quickly.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.