October Plays Another Dirty Trick – Here’s What You Do Now

Bad things have a funny way of happening in October.

Remember October 1929? Me neither. But it raised the curtain on the Great Depression.

Or maybe you do recall the infamous Black Monday crash in 1987. The Dow tumbled 22%— the largest single day loss ever. Guess what? That was in October, too. The 19th to be exact. Notice a trend here?

Fast forward to this October…

You know what happened this month. And if all that wild market action kneed you in the gut, don’t say I didn’t warn you…

Allow me to quote the Rude issue of September 30th. Here’s what i said:

“The craziest month of the trading year is less than 24 hours away…fall is crash season.

I practically screamed it from the rooftop of my Baltimore office – “Batten down the hatches!”

And I was right. (Don’t worry, I’m not gloating. Okay, maybe a little.)

Like I said, I don’t have to tell you what happened. But after the fire was out, the suckers— I mean speculators—jumped right back in with both feet. They’re chasing rainbows in anticipation of the big market rebound. And sure enough, Tuesday was the best trading day of the entire friggin’ year. The S&P posted a gain of almost 2%.

What could possibly go wrong?

You’re probably thinking that’s a loaded question. And dammit, you bet your sweet “V-bottom” rally it is…

Look, this market is more screwed up than you realize. If you think the S&P is going to magically rise 2% every day, I have some oceanfront property in Kansas – and it’s got your name on it.

I’m not saying this is 1929 or 1987 all over again. It’s not.  Not every October swoon leads to disaster.

But it’ll be a tough slog back toward recent plateaus. The road is cratered with some nasty potholes. And there’s one huge psychological road block we have to surmount on the way back: S&P 2000. Let me explain…

Listen, round numbers aren’t magic. There’s nothing special about hitting 1000, 2000, or hell, 200,000 on the S&P. But humans are simple creatures. We think in round numbers; we think they mean something. They don’t. (I’ll have to remember to tell my wife that on my 10th wedding anniversary).

It’s been 16 years since the S&P hit a round number flashy enough to mark a major market milestone. And as I reminded you back in September, the S&P had to claw and scrape its way uphill to clear 1,000 in 1998.

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It took three months and a few sharp pullbacks for the S&P to top 1,000. In fact, investors had to ride out a nasty 13% drop in October of 1997… before the S&P made a second run at 1,000. And even as the market approached the magic number again in December, stocks once again retreated. The market didn’t break out until February 1998.

That’s exactly the kind of manic market action we’re seeing today. Once the 1,000 barrier finally fell back in ‘98, investors got a huge tailwind bringing them double-digit gains in just two months.

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We’re not there yet. We’ll get to this point– but it’s going to take time. And a lot of choppy back-and-forth trading lies ahead before we see a breakout like this.

The Daily Reckoning