October is on track to become one of the worst months on Wall Street in nearly a decade. Here is a link to download the S&P 500’s monthly returns going back to the end of 1987 – sorted by largest gain to largest decline. Sellers showed up over the past several weeks and sent stocks plunging due to a potentially dangerous one-two punch.
First, the market believes the Federal Reserve and other global central banks are going to become more aggressive which is designed to curb economic growth and inflation. Second, a slew of economic data is already beginning to slow down which is not healthy sign. Remember, the last recession was 10 years ago which is a very long time. Historically, recessions occur every 5-10 years and tend to last around 10-18 months.
Needless to say, we are way overdue for another recession and the same is true for another bear market. The average bear market typically lasts 18-36 months and bear markets tend to occur at least once every decade. The last bear market was in 2008-2009 so we are way overdue for another bear market. Only time will tell when that happens but for now we know the market is very oversold and way overdue to bounce. The key is to analyze the health of the bounce to see if it is another dead-cat bounce or if it has legs. The bulls will argue that the major indices are forming a bullish, albeit sloppy double bottom pattern, while the bears argue the market is topping out and could be forming a large head and shoulders top (Feb’s low was the left shoulder, September 2018 will be the head and then we will form right shoulder then crash). Again, no one knows what will happen tomorrow, but I do know that February’s low is the next important level of support to watch and if that level is breached, odds favor we are headed much lower. I also know that volatility has picked up severely in 2018 and that typically happens near the end of bull markets, not in the early stages.
