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Stock Market Outlook for October 1, 2015

 

Equity markets shift from “risk-off” to “risk-on” in the fourth quarter, gaining an average of 4.06% (S&P 500) since 1950.

 

Real Time Economic Calendar provided by Investing.com.

 

**NEW** As part of the ongoing process to offer new and up-to-date information regarding seasonal and technical investing, we are adding a section to the daily reports that details the stocks that are entering their period of seasonal strength, based on average historical start dates.   Stocks highlighted are for information purposes only and should not be considered as advice to purchase or to sell mentioned securities.   As always, the use of technical and fundamental analysis is encouraged in order to fine tune entry and exit points to average seasonal trends.

Stocks Entering Period of Seasonal Strength Today:

BCE Inc. (TSE:BCE) Seasonal Chart

 

The Markets

Stocks staged a rally on Wednesday, benefitting from end-of-month and end-of-quarter portfolio reshuffling.  The S&P 500 Index ended higher by almost 2%, led by the Consumer Discretionary sector as investors continue to bet on the strength of the consumer.  The period of seasonal strength for discretionary stocks is ahead of us, leading into the holiday season at the end of the year.  The S&P 500 Index is showing signs of bouncing from support around the August lows, so the question we must ask is “Are we there yet?”  Is the equity market charting a double bottom pattern around current levels, presenting an ideal entry point to the period of seasonal strength that starts in October?  With only four weeks remaining until the average start to the seasonally strong period for broad equity benchmarks, we are within the period when seasonal lows start to become realized.  A look at the hourly chart of the large-cap index will help us to answer the question whether a low risk entry point has been achieved.  Over the past couple of weeks, the benchmark has been constrained around declining trendline resistance, which is tracking closely with the 50-hour moving average; the benchmark ended precisely at this level of resistance at Wednesday’s close.  Investors will want to look for more evidence that the benchmark is no longer constrained by resistance, but rather building momentum around support.  A definitive break above short-term resistance at 1920 would go a long way in confirming the potential double-bottom support around 1875.  Investors looking to make a long bet on some of the seasonally favoured sectors that kick in around this time of year, including Canadian Banking, Transportation, and Technology stocks should seek to place stops around the August lows, thereby limiting downside risk.  Major moving averages on the daily chart continue to point lower, implying negative trends across multiple timescales.

Wednesday’s gain capped a difficult quarter for equity investors as concerns pertaining to china, slumping commodity prices, and, more recently, struggles pertaining to widely favoured health care stocks resulted in significant declines for broad market benchmarks.  The S&P 500 Index was lower by 6.94% in the third quarter, breaking significantly below a trading range that spanned the first half of the year.  The only sector that managed to buck the declines was the Utilities sector, gaining 5.40% and benefitting from the decline in yields and the defensive characteristics that the constituents offer.  The outperformance of defensive assets was also apparent in the consumer staples sector, which ended predominantly flat (-0.22%) for the quarter.  The cyclical, materials sector was one of the weakest performers, losing just over 17% for the three month period.  The equity market volatility, strength of defensive assets relative to the market, and weakness of cyclical sectors are typical of this third quarter period when a lack of favourable fundamental events result in sporadic equity market performance.  The fourth quarter typically sees a reversal of these negative forces as investors take advantage of depressed asset prices into October and November.  Since 1950, average return for the S&P 500 Index for the fourth quarter is a gain of 4.06% and positive results have been realized in 51 of the past 65 periods.  Generally, sectors that tend to perform best are those than benefit from end of year consumer spending leading into the holiday season, including consumer discretionary, consumer staples, and technology.

UTILITIES Relative to the S&P 500

STAPLES Relative to the S&P 500

Focussing specifically on the month ahead, despite it being a notoriously volatile month as bulls and bears battle for control following the erratic summer period, the S&P 500 Index has averaged a gain in this 10th month of the year.  Over the past 50 years, the large-cap index has closed higher 60% of the time, averaging a gain of 0.9%; over the past 20 years, the average return is an even better 1.8%.  Strongest sectors, based on data from the past 20 years, are consumer discretionary, consumer staples, technology, and financials, each averaging a gain of over 2% for the month.  Weakest sector has been the utilities sector, gaining a lacklustre 0.8% in the midst of the strength in cyclical sectors.  The average start to the period of seasonal strength for the broad equity market is at the end of the month, resulting in a shift from “risk-off” to “risk-on” for the six months that follow.

S&P 500 Index Returns:

DISCRETIONARY Relative to the S&P 500

TECHNOLOGY Relative to the S&P 500

Sentiment on Wednesday, as gauged by the put-call ratio, ended bullish at 0.84.

 

 

Sectors and Industries entering their period of seasonal strength:

^GDAXI Relative to the S&P 500

 

 

Seasonal charts of companies reporting earnings today:

 

 

S&P 500 Index

 

 

TSE Composite