Seasonality And Other Indicators Are In Favor of The Bulls

The markets put together one of the worst weeks in recent history and it is now time for a fresh five trading days to begin. Monday also marks the beginning of the first full trading week of the final quarter and of October. As you may already know, October is often referred to as the month of “bottoms” because a high percentage of bear markets have concluded during the month. As a matter of fact, 5 of the last 9 bear markets since 1950 have ended in the month of October. What is even more surprising is the raw numbers for the month of October; it has been the best month of the year for the market, followed by November (#2) and December (#3). Just because a high number of bear markets have ceased to exist in October it does not mean it will happen again in 2008, though the percentages are above normal.

Not only is seasonality in the favor of the bulls to put an end to the reign of the bears, but so are several other bottoming indicators. Probably one of the most reliable and popular is the CBOE Volatility Index VIX (VIX). The VIX measures fear in investors and high readings suggest fear is so high that it is usually time to do the opposite and buy. When everyone is selling, the market is typically close to a bottom and vice versa. When the fear readings of the VIX move to extreme low levels it often predicts a short-term or intermediate-term high.

So what are our plans going forward in October? They are two-fold. For starters we will continue to look at both buying and selling opportunities based on the individual ETF or stock. The analysis will be based on where the investment is now and not what it has done in the past several weeks or since the time of purchase. For example, we will not sell only our winners or losers based on past performance. We will sell those investments we feel do not give us the best opportunity going forward and hold those that still meet our criteria. As far as buying, this will be VERY selective and may not begin for another week or two depending on the market action. Trying to get in early can be a very destructive strategy and in the end I would rather pay an extra dollar per share and lower the risk.

Finally, as we decide whether to buy/hold/sell in the coming weeks, the key will be to stay diversified, hedged, and number one, preserve capital as the market continues its bottoming process. With the S&P 500 now down nearly 25% in 2008, the key will be to keep the losses to a minimum so that when the market does turn around, your portfolio will be starting from a higher level. As much as I strive to grow your portfolio in up and down markets, I do realize in a bear market such as this, the key is to minimize losses and hold steady when the storm is hitting. But, keep in mind it is always darkest just before the clouds break and I believe we are very close to the sun shining through.

Have a great week.

Posted in Categories: Contributor, External Research, Stocks, UK.

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