by Jason Bodner

October 11, 2022

The traditional flower of October is the calendula, symbolizing comfort, healing, protection, and grace.

After September, we need some healing. I warned you that September would be a volatile month. History says that it is one of the worst performing months since 1990. This September was certainly no exception, with all the indices taking a brutal beating and ending the month spiking violently downward.

The good news is that, as predicted, the Big Money Index (BMI) went oversold on September 30th. Since then, the markets have bounced sharply higher, which also plays into the history I’ve highlighted, since I pointed out that October through December are historically strong months going back to 1990. Also, as a quick reminder, the forward returns of the S&P 500 are very strong after we see an oversold BMI:

  • After 1 month +3.1%
  • 3 months +5.2%
  • 6 months +9.2%
  • 9 months +9.6%
  • 12 months +15.3%
  • 24 months +29.8%

With all the violent action we’ve seen in September, it always pays to look at what’s going on under the surface of the big indexes. The best place to start is by looking at the individual sectors and what types of stocks are pushing and pulling the sectors themselves. Approximately 3,500 stocks showed up on my system for September making either a buy or a sell signal. It’s fascinating to note that only 11% of those stocks were buys, so I’d expect to see a lot of one-way action when digging into these sectors.

This table shows how the sectors shook out, ordered from the most buying to least in terms of percentage:

A common theme emerged: Dividend paying stocks were under pressure, due to the volatility surrounding interest rates. The Fed has lifted rates the fastest and furthest in history, according to the Visual Capitalist:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

That rapid rate increase puts pressure on stocks paying out stable dividends. That’s because as rates rise, more compelling rates of return are available. For the longest time, with zero interest rates, you had to buy dividend stocks for income, as you couldn’t get any meaningful return in bonds. That’s not the case anymore, so when looking at September’s selling, we note big selling in interest-rate-sensitive stocks.

REITs were the main pain point in September, accounting for 14% of all selling last month. REITs are obligated to pay out between 75 and 90% of their earnings in the form of a dividend. When rates were near zero, REITs were desirable. That was then, this is now. Powell also aims to bring rents down. Since REITs make money from tenants paying rent, that also casts a pall over REITs’ ability to pay dividends.

We also saw selling in utilities stocks, specifically energy utilities, which are known for paying dividends. Selling happened in industrials stocks, too – notably in defense and aerospace manufacturing. This space may be viewed as less necessary in an economic tightening environment, and they often pay dividends.

Financials saw selling too, and insurance companies are another example of rate-sensitive securities. The stable dividends offered by insurance stocks become less desirable as rates rise as fast and as far as they have in recent months. Staples selling was in food and beverage producers, accounting for roughly 50% of the selling in the staples sector. Other notable staples selling was in household products stocks, and personal care and cleaning products. Again, rising rates pressure stable dividend stocks like staples.

Communications companies are often rate-sensitive stocks, so they also saw selling in September.

Tech, Discretionary, and Materials stocks also got clocked. Fed chair Jerome Powell blatantly said that “painful” times lie ahead, mostly from economic tightening. Less money means fewer vacations, which punished leisure stocks. It will be harder to get cars, as borrowing rates escalate, which pressured consumer vehicles and parts stocks. Less disposable income means less discretionary spending.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Here’s the silver lining: If history serves as any guide, the bad news should be behind us. Remember, in late August, I said that Septembers are historically weak. But going back to 1990, October through December are very strong. Since 1990 the average monthly return of the S&P 500 in September is -0.5%. But October’s average is +1.4%, November’s is +1.8%, and December’s is +1.5%. And if the first few trading days of October are any sort of indication, history looks set to repeat itself again.

On Tuesday, October 4th, we saw a day of zero selling in stocks or ETFs, according to MAPsignals data. This is directly following several days of extreme selling. September showed nearly 80% of all signals as sells, and 41% of all that selling took place during the final week, September 26 through the 30th.

The first two days of October saw tremendous reversals in the market. The SPY rose 2.64% and 3.10% on October 3rd and 4th, respectively, or 5.8% compounded. It’s important to note that this rally was on more than two times the average daily unusual institutional volume, according to my data. That means that it’s a high-volume rally. And I went back in our data to look at prior times where there was zero selling after a huge bout of selling. I looked for days where the average unusual institutional volume was greater than the 32-year average. A very clear picture of strong forward returns emerges. It’s important to qualify this though, as many of those days occurred in 2020. Nonetheless, also included in this data set are significant time periods in the summer of 2009, spring of 2016, and the markets meltdown of December of 2018.

The average forward returns of this limited data set are stunning:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As I write this (on Friday, October 7), the market is experiencing yet another volatile day after the jobs report came out. Even then, the data piles up for a promising fourth quarter for stocks, so I’m optimistic, because, as philosopher William James said: “Pessimism leads to weakness, optimism to power.”

All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

About The Author

Jason Bodner

Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner

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