The Trading "Jinx" You're Facing Right Now -- and How to Beat It

Get ready– the “jinx month” is upon us…

A new trading month begins Thursday. And if you’re a student of the markets, you know October can be one hell of a month for stocks…

Yes, October is “known as the jinx month,” as the Stock Trader’s Almanac reminds us. Why? Do the 1929 and 1987 crashes ring a bell? What about the 1997 swoon? And how about the back to back massacres in 1978 and 1979… 1989’s Friday the 13th … and the 2008 meltdown? All occurred in October.

So it’s only fitting that the market’s teetering on the brink of another breakdown right now. So buckle your chinstrap. This month could be a doozy.

Just look at how the trading week ended on Friday…

The market’s feeble attempt at a rally fell apart hours before the week came to a close. Only the Dow escaped the day with a gain. The S&P 500 and the Nasdaq weren’t as lucky. Both finished the week in the red, with the S&P posting its sixth loss over the past seven trading days.

One by one, formerly bulletproof stocks and sectors are losing their grip. Investors have tossed the almighty biotechs back into the fire with the rest of the sinners. The sector dropped nearly five percent yesterday, closing below its August lows. The bulls are rolling over as the last minutes of the third quarter tick away.

But while every investor in the world watched the biotech crash Friday, we noticed another nasty breakdown…

Back in early August, I warned you that small-cap stocks were beginning to fall apart.

Here’s the chart:

Russell 2000 Small-cap Index

Earlier this year, we were impressed when small-cap stocks finally started to outperform their bigger cousins. That’s because it’s bullish when smaller, more speculative names outperform the blue chips. That means investors are more willing to lay down their hard-earned dough on riskier bets.

The Russell 2000 small-cap index was out-slugging the major averages earlier this year. But since June, these small stocks have started to lose momentum. Now, they’re going backwards. As you’ve probably already guessed, the Russell is already well below the red line.

Need another view? Take a look at the performance of the Russell 2000 vs. the S&P 500 since late June:

Small, but not strong...

While the S&P has dropped 9% since late June, the Russell 2000 is down more than 13%. In fact, small-caps actually dragged the market lower Friday. The Russell was off by 1.3%, while the S&P lost about 0.9% on the day.

From our vantage point, it looks like there’s more trouble around the bend for stocks. I’m not trying to scare you—that’s just what the charts are whispering. When speculative stocks like biotechs and small-caps begin to sharply underperform an already-weak market, the investing herd will only grow more anxious. And you guessed it—that anxiety snowballs into more selling.

First things first: Protect yourself in this market environment! Don’t overload your trades. Obey your stops. Protect your gains. Stay smart.

The jinx month is upon us. But October 2015 won’t be a 1929 or 2008 redux. However, that doesn’t mean you shouldn’t be paying attention…

Being a good trader doesn’t mean being aggressive, or foolishly contrarian. It means being smart. It means taking the markets as they are, not as you’d like them to be.

And at times like this, being smart usually means sitting on your hands for a bit. Can you?

Sincerely,

Greg Guenthner
for The Daily Reckoning

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