In my last blog post, the topic of discussion was the bumpy ride markets took in August but how historical data indicated a potentially strong finish to the year. Indeed, August was tough, but September was even worse. As a result, many investors have growing concerns about the current state of the markets—a normal reaction, to be sure.
Still, historical S&P 500 data points to a strong Q4, suggesting a reason for cautious optimism. To see what we might expect ahead, let’s look at three technical indicators, along with some constructive data.
Major Indices Breakdown
From a technical perspective, I define an index, a stock, or an ETF as being in a long-term “uptrend” if it meets the following criteria:
- Price > 50-day moving average (50dma) > 100-day moving average (100dma) > 150-day moving average (150dma) > 200-day moving average (200dma)
- A 200dma line trending upward
- Current price within at least 25 percent of its 52-week high
- Current price at least 25 percent above its 52-week low
Looking at the S&P 500, the Nasdaq Composite Index, and the Dow Jones Industrial Average, we see that none of the three major equity indices are in an uptrend. Currently, all three are trading below their 50dmas.
When we examine major-sector ETFs (e.g., healthcare, technology, semiconductor, energy, consumer staples), we find that virtually none of the major sectors meet my uptrend criteria.
52-Week Lows Galore
A healthy and constructive market is one that has more individual equities hitting new 52-week highs than hitting 52-week lows. After the market close on September 22, there were 43 U.S. individual equities that hit a new 52-week high and 376 that hit a new 52-week low. To add cause to concern, growth sectors such as the healthcare sector (141 names), the technology sector (47 names), and the consumer cyclical sector (49 names) led the new 52-week lows.
Damage Underneath the Surface
On March 14, the Nasdaq 100 Index burst through the 50dma and the 200dma. The Nasdaq 100 Index is still trading safely above the 200dma but recently broke below the 50dma (on August 9), the first time it has broken through since March 14. Since then, the Nasdaq 100 Index has been hovering above and below that 50dma line, with it now trading slightly below it.
The Nasdaq 100 Index tracks 100 names, with most falling under the technology sector. On July 19, 85 percent of the 100 names the Nasdaq 100 Index tracks were trading above the 50dma and 81 percent of those names were trading above the 200dma. Fast-forward two months to September 22, and the numbers stood at 17 percent trading above the 50dma and 60 percent trading above the 200dma.
Historical October Data: A Reason for Optimism?
For reference, in my previous blog posted August 15, we discussed how the S&P 500’s first half-year return suggested a potentially strong year-end finish. Now that September is behind us, we have more data to work with.
Looking at monthly S&P 500 data since 1950, there have been only 13 years where the months of August and September were both negative months. With this September being negative, 2023 will be the 14th instance. In reviewing those 13 prior instances, we find that 10 of those 13 years had a positive October and 12 of those 13 years had a positive Q4, with an average Q4 return of 9.24 percent.
In the short term, it may seem difficult to take an optimistic view of the markets. After all, many indices and individual stocks continue to lose key moving averages. Further, underneath the surface, we see weakness in the growth sectors. But despite it all? Historical S&P 500 data continues to point to a rally into the end of the year.
A moving average is a calculation of the average price over a set period of time.