Stocks: Still Building a Base

While October could be the month that finally stops the bear, that doesn't mean that the market is in for huge gains

By Paul Cherney

The S&P 500 lost more than 10% in the June through September quarter. The index has only done this 12 prior times (since the second quarter of 1960); 10 of those losses of 10% or more were followed by gains in the next quarter. The performance of the quarters following the huge losing quarters are positive, but three out of four of them are not huge gains. After the 1974 third-quarter loss of 26.12%, the S&P 500 gained 7.90% in the fourth quarter; after the fourth-quarter 1987 loss of 23.23%, the following quarter was up 4.78%; after the second-quarter 1962 loss of 21.28%, the following quarter saw a gain of 2.78%; and after the second-quarter 1970 loss of 18.87%, the following quarter saw a gain of 15.80%.

These are the percentage changes for the entire quarter, a three month period, so I think it's important to note that the markets (as measured by the S&P 500) are probably still in a bottoming process which is going to see jagged trading. When I commented that October had a good chance of being a bear killer (seeing the end of the bear market), it does not mean that stocks are going to just turn around and rocket higher. The historical evidence is not supportive of huge gains. This is a bottoming process. Compared to the losses of the past two-and-a-half years, just going sideways might be a relief.

Remember: I looked at price action during Octobers which follow big losing September quarters (losses over the prior 66 trade days of more than 10%). The lowest close in the next 22 trade days after the conclusion of a 10% down third quarter tend to happen by the sixth trade day of October, so technically, there is still risk for a close under Monday's 815.28. Wednesday, Oct. 2, was only the second trade day after the close of the third quarter. Historically, the worst closing loss in an October after a deeply losing third quarter was 5.66% under the price on the day of the close of the quarter.

Many mutual funds end their fiscal year in October and with another down year coming into October, there could be tax loss selling by the mutual funds, but probably only if prices undercut the Sept. 30 lows dramatically.

October has a reputation of being a bear killer (meaning some big bear markets have ended in October), prices can push lower in the beginning of the month and then rebound in the second half of the month.

Support: Immediate S&P 500 support is 828-812 and 818-780 which makes 818-812 a focus. The next support is 763-733.

Immediate support for the Nasdaq is 1190-1170, then 1154-1118.

Resistance: Immediate intraday resistance for the S&P 500 still is 838-856.60 then 878-893.

Immediate resistance for the Nasdaq is still 1206-1240.

Cherney is chief market analyst for Standard & Poor's

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