Setting Aside Complicated Market Timing Strategies

Written by: Eugene Peroni | Peroni Portfolio Advisors

Arguably, the calendar has been the best forecasting tool over the last year. When the stock market struck a low last October, it proved to be a forceful pivot point that catapulted the S&P 500 higher. This rebolstered the Wall Street tradition that the November through May period can offer a friendly investment climate. In this instance, however, the timeline extended into mid-July. But August earned its reputation as a month for establishing stubborn technical fencing that limited rally attempts while also ushering in the historically worst month of the year for equities. This seasonal cycle now has come full circle and the question is whether October 2023 will produce another key reversal that prompts a sustainable recovery. I am observing some technical signals that would argue in favor of an encore performance that might be more sector and theme inclusive than a year ago.

An indication that the market may be in the process of reaching a bottom this month is observed in the action of the CBOE Volatility Index (VIX). Through much of the stock market’s consolidation that ensued following its July peak levels, the VIX remained nestled near the lower edges of its yearly range. However, when the Federal Reserve Board recently signaled that persistent inflation pressures could require further interest rate increases, the “fear index” rallied almost 50% reflecting an initial shakeout of investor complacency. Heightened bearish psychology is often a necessary precursor to a meaningful bottom. The increased volatility came near the end of the quarter as portfolio managers acted to window dress holdings and sector weightings in anticipation of potential economic and monetary developments on the horizon. Increased caution was further reflected in a recent American Association of Independent Investors (AAII) Sentiment Survey that revealed a buildup of bearish sentiment well beyond its historical norm. This abrupt change in market psychology enhances the prospects for October to be pivotal for stocks.

The stock market may soon be getting its “Gretzky” on, skating through the worst of the economic and monetary headwinds, and moving to where it perceives the puck (market) is going. Seasonal factors could favor the bulls as November approaches and investors ponder whether next year’s presidential election cycle could bestow good fortune on the stock market. In the meantime, this may be a good opportunity to evaluate holdings based on the relative strength trends playing in the market. Conventional wisdom may fall short as an effective investment approach. Even with ongoing uncertainties on numerous fronts, investors appear to remain committed to the growth themes. This is underscored, in part, by the unrelenting wide performance discrepancy between the Dow Jones Industrial Average and the Nasdaq Composite.

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