Declines across broad domestic equity indices continued Friday, with the S&P 500 Index SPX posting an intraday loss of -1.72% to bring it to a -4.65% return over the past week. Sharper declines earlier in the day led the 20-point chart of SPX to violate support previously seen at 3740 before falling to 3680 intraday. The chart now sits just a few boxes shy of the 3640 low seen in June and has given two consecutive sell signals over the past week. The sharp decline this week has also led to a weekly OBOS reading of -83% Friday, which marks one of the lowest end-of-week oversold readings for SPX since 2020. SPX has seen a reading of -83% on two prior instances this year, occurring on 5/20 and 6/17. The oversold nature of the index does suggest a heightened potential for a near-term rally, but it will remain to be seen if such a rally can be sustained.

The most recent drop for SPX led to its third 10% correction so far this year, which is tied for the most in any year dating back through 1950. To qualify in this count, the SPX needs to see a 10% decline followed by a 10% rally off that relative bottom. Other years that saw three separate 10% moves include 2008 and 1987. The first such occurrence this year came at the end of February, with that low coming on March 8. The S&P 500 then saw an 11% rally over the next three weeks, before again declining at the beginning of April. That movement saw a 20% drop ending at a bottom of 3666 on June 16, only to have the index turn around and climb 17% by August 16. The index has now seen a decline of about 14% from that date through movement Friday.

We have now seen four separate 10% corrections in the 2020s including the drop in early 2020. That compares to six such instances throughout all the 2010s. The 2000s saw significantly more corrections, at a count of eleven. Since the beginning of 1950, the S&P 500 has averaged between just under seven corrections in each decade, with those instances seeing an average correction-to-trough decline of -7.96%. Some decades, like the 1960s and 2000s, have seen double-digit correction-to-trough averages.

On the other hand, the 1990s and 2010s saw average further declines of -3.57% and -4.71%, respectively. We are currently at a 4.65% move lower from the 10% drop seen on 9/16. If we were to see a decline in line with the -7.96% average further decline since 1950 would place the index near 3580, or just beneath the bottom of the current trading band.

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Last Friday, we looked at historical returns for the back half of September. Keeping with the theme and given that October is now just one week away, we wanted to discuss the tendency for investors to either love or hate the month of October.

Investors have a longstanding love-hate relationship with the month of October. Some of the more notorious market meltdowns have occurred, or at least escalated, in October; including 1978 (-9%), 1987 (-22%), and 2008 (-17%). And several of the largest one-day market declines, including Black Monday (1987) and Black Tuesday (1929), happened in October. Still, the S&P 500 (SPX) has had more double-digit gains in October than it has had double-digit losses since 1950. In fact, October is often referred to as the "bear killer," as its end ushers in the beginning of the seasonally strong six months of the year.

October offered some of the more meaningful buying opportunities of the post-GFC long-term bull market including 2011 and, more recently, in 2015 when the S&P 500 rallied over 8% during the month. Furthermore, the S&P was up nearly 7% last year. However, the worst October since 2008 came just four years ago in 2018 as SPX fell nearly 7%, in keeping with October’s love-hate reputation. Historically speaking, October has been positive more often than not, as the S&P 500 has logged gains in 60% of the Octobers between 1950 and 2021. The average return for the month during this time frame is +0.85%.

The histogram below is another visual that helps us wrap our hands around October's past behavior. It categorizes each October's return into a performance bracket, allowing us not only to see that there have been more up Octobers than down Octobers, but also the degree to which they have been up or down. If we look at the extremes, notice that only five Octobers since 1950 (including 2018) have experienced a decline in excess of -5%. The most common experience in October has been a gain in the range of 2.5% - 5%.

At the time of this writing, the S&P 500 is down over -5% for the month of September which makes the cut for the top 10 worst Septembers since data beginning in 1957. Following the 10 worst September returns, October was positive 60% of the time. When October was positive we saw an average gain of nearly 8%, and when October was negative we saw an average loss of about -5%. As mentioned before, October of 2008 posted a spectacular loss of -17% yet October of 1974 saw a gain of 16%. So, following a rough September, it would not be unusual to see volatility spill over into October.

Finally, the graphic below illustrates the average daily returns of the S&P 500 Index in October going back to 1950, as well as the frequency of positive daily returns for each trading day. Historically, the month has both started and ended well, with the last four trading days of the month producing gains more times than not. The days in between have tended to produce a very different experience, with more substantial moves in both directions. However, 2022 has been a year unlike any other (by seemingly countless measurements), so there is a real possibility of deviating from historical norms.

Portfolio View - Major Market ETFs

Additional Comments:

The SPDR Dow Jones Industrial Average ETF Trust DIA printed a sell signal with this week’s action at $295, which brings it back into a negative trend on its default trend chart. The fund has a current score of 2.20 with a negative score direction of .92. The fund scores below the average US score of 2.61. Support is offered at $265 from October 2020.

The iShares MSCI Emerging Markets ETF EEM gave its ninth consecutive sell signal last week and is at a current price of $36. The fund has a very weak score at 0.39 with a -1.42 score direction and remains in a negative trend. EEM is also beneath the average non-US score of 1.37. The overall technical picture for EEM remains negative. Support is seen at $35.50 on the default chart.

The iShares MSCI EAFE ETF EFA sits in a column of O’s this week at a current price of $57. The fund has a weak score of 0.43 which is below the average non-US equity fund of 1.37 and is paired with a -1.37 score direction. The fund remains in a negative trend and on a third consecutive sell signal. Support is offered at $51 on the default chart.

The iShares MSCI Frontier and Select EM ETF FM reversed down last week and sits at a current price of $25.50. The fund has a weak fund score of 2.10 and is paired with a -1.40 score direction. The technical picture is negative, following other international equity funds lower. The fund is seen at support on the default chart at $23.00

The iShares S&P MidCap 400 Index Fund IJH remains in a column of O’s this week, falling to a price of $225. IJH has a current fund score of 3.01, which is above the average US score of 2.61. Support can be found at $220 on the default chart.

The iShares S&P SmallCap 600 Index Fund IJR reversed down into a column of O’s last week giving a sell signal and is at a current price of $88. IJR now sits with an unacceptable fund score of 1.88 and is paired with a -1.21 score direction. Initial support is offered at $85, which was last seen in 2020.

The Invesco QQQ Trust QQQ continued lower this week after giving a sell signal last week and is at a current price of $275. With last week’s movement, the fund violated its bullish support line. The recent 1.62 fund score is lower than the average US fund (2.61), and the fund holds a negative 2.44 score direction. Initial support is offered at $270.

The Invesco S&P 500 Equal Weight ETF RSP reversed down last week, giving a sell signal. This week saw RSP fall back into a negative trend. The fund is at a current price of $130 and does now hold a negative 1.22 score direction, paired with a fund score of 3.96. This beats the average S&P 500 Index fund score of 2.61 and remains the highest score of funds in this report. Support is seen at current levels, $130.

The SPDR S&P 500 ETF Trust SPY reversed down into O’s with last week's action and sits at a price of $365. Last week’s action saw SPY flip back into a negative trend. SPY has a 1.86 score posting and a now negative score direction of -1.22. Initial support is offered at current levels, $365.

The Invesco S&P 500 Top 50 ETF XLG remains in a column of O’s this week and currently sits at a price of $280. XLG has a 1.84 fund score and a negative score direction of -2.42. Like the other large-cap domestic equity funds, this mega-cap representative saw its technical picture weaken over the past several weeks, and while the return to a buy signal in August is a positive sign, further confirmation is needed before signaling a return to a more positive technical picture. Initial support is offered at $280 and further support at $250 from October 2020.

Looking at broad market representatives SPY, QQQ, and DIA, all three default point and figure trend charts are near or below key levels of 2022 support. This week's action has caused many of our major market ETF's to fall back into negative trends and test 2022 lows. 

The story remains largely the same with small and mid-cap representatives IJR and IJH, which find themselves at or beneath 2022 lows. 

Daily Option Ideas for September 23, 2022