Bear Hibernation Begins In October

Let me be the first to send out the birth announcements - a new head-and-shoulders top is about to emerge. Or so the bears are soon going to be yelling. Think back to May-July. About every Talking Head on CNBC and most bloggers (except moi) were claiming that the long awaited correction was just about to finally arrive. The only problem was that they all lost sight of the forest because they were fixated on the trees.

We may be looking at a similar chart pattern emerging. It’s very early in the game but the sharp eye of experienced chartists will see what I’m talking about (click on image to enlarge).

As you can see, since you’ve all become great chartists from reading this blog, the market confounded the bears last summer and absolutely ignored what what they claimed was supposed to be a reversal. Now, without the market even yet completing the pattern’s head by bouncing off of a would be neckline, talk may again fill the airwaves and blogosphere about declines all the way to the March lows.

Furthermore, to the Bear’s glee, this time we’ve entered October, supposedly the cruelest month of the year for the stock market (if you don’t believe me, check out the bear cave at Slope of Hope after you finished reading what I have to say where the head “sloper”, Tim Knight, actually titled his post tonight “Our National Nightmare is Over”).

But here’s an interesting fact the Bears won’t mention: the market declined 22.5 point, or 2.21%, this September 1, the worst ever first trading day in September but wound up turning in the best September performances since 1998. October’s opening day mirrored that of September with a 27.23 point delince, or 2.58%. The rest of October could mirror the rest of September.

I’ve marked on the above chart two key support areas: the 50-day moving average at 1021 and a long-term trendline that served as resistance in both November 2008 and all the way back as the peak of the traders’ remorse correction after the Tech Bubble Crash double-bottom in June-October 2003. Resistance levels often turn into support and it may be the same case here.

The last remaining Bear Trap is that October, notorious for crashes, is actually a good average month for the market (click on image to enlarge).

In fact, from 1963-2007, the market end October higher than where they began 62% of the time, or 28 years, and declined only 38% of the years. The worst year, of course was the 1987 crash with a 21.8% decline. When you exclude that year, the average performance in October shows a 1.63% increase with the best performance in 1974 of 16.3%. When coming out of Bear market’s or crashes (see 1982, 2002, 1974, 1998), October’s tend to show some of the best performances.

Let’s hope that as the leaves begin to fall, bears begin hibernating until spring.

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