After coming off a week where the S&P 500 lost -2.7%, and the NASDAQ lost -2.9%, investors are spooked. Friday did little to calm investors fears, so we want to take a closer look at October and the next three months.
Oddly, the summer months were very kind to investors. Contrary to investor expectations, the S&P 500 gained 3.27% during the summer months of June, July and August. September is usually the worst month for the markets while October has the reputation of being the "Bear Killer". So why are investors so skeptical of October?
The month of October is historically known for its dramatic market crashes. The stock market crashes of 1929, 1932, 1987, 1989, and 1997 all occurred in October. This being said, the last half of the month begins to develop bullish trends that kick off the best three months of the year.
From 1929-2004, the S&P 500 averaged yearly gains of around 7%. The months of November, December, and January accounted for a little over half of the 7% yearly gains. With most of the bad news already on the table, investors cannot remotely fathom how the stock market can rally in light of high energy costs, soaring budget deficits, devastating hurricanes, rising interest rates, and massive consumer debt. This may be the very reason why the stock market will put on an impressive performance through year-end.
No one knows for sure what the markets will do, but my bet is a decline in energy prices will be the spark to ignite the rally. All eyes are on the $60/bbl mark for oil. Should traders continue to put pressure on the price of crude, the favorable November-January period will revert back to its normal bullish pattern.
This morning, Best Buy (BBY) said that the recent hurricanes will bring down its earnings estimates by .02. This is no big deal, and since BBY usually beats its numbers, they may actually surprise on the upside.
A favorable article in Barron's suggested that Wal-Mart (WMT) shares could jump 40% over the next year. We knew WMT was cheap, and I'm glad that someone other than us noticed.
We are exchanging half of our position in the Rydex Tempest 500 (RYTPX) and buying the Rydex Titan 500 (RYTNX). Tempest is a bear fund, and Titan is a bull fund. Both funds attempt to do 200% of their respective indexes. That is, 200% on the downside for Tempest, and 200% on the upside for Titan.
If we get the rally that I am anticipating, I will revert back to my bearish outlook around the 1250 mark on the S&P. We may leave some on the table, but I do not want to be at the table in 2006.
