The Hunt for Red October

Happy "end of month/end of quarter/government shutdown Tuesday" to all who celebrate. Not only without a meeting of the minds in our nation's capital, which as I work through the zero-dark hours on Tuesday morning, appears unlikely, but traders and investors will have to wade through increased trading volume late this afternoon. It may be tough, but when you see that trade of yours, that you truly have some conviction in, get a bit wonky later, try to keep in mind that forced price discovery is not always honest price discovery.

What I am saying is that the S&P 500 is up 3.11% for September. The Nasdaq Composite is up an even more robust 5.29%. For the third quarter, the Nasdaq Composite has gained an impressive 10.9%, while the S&P 500 added 7.4% Yields are lower than they were three months ago and that should ease any mandated pension fund rebalancing to some degree. Still, there will be volatility. Still, there will be volume. Still, tens of billions of dollars are going to move, likely more out of equities than in the other direction.

Like a "Triple Witching" expiration event, we will not take this afternoon's trading volume into account when we try to interpret the day's activity from a technical perspective. Easier said than done, the bottom line is, just don't get rattled if you see something that may be very temporary happening this afternoon.

Shutdown Looming

In March, Sen. Minority Leader Chuck Schumer of New York and a small contingent of Democrat party Senators voted with the slight Republican party Senate majority and passed a bill that kept the federal government funded and open for business at that time. Schumer ran into some intra-party interference for doing so. It does not appear at this time that he is likely to go down that path again.

I won't get into the politics of it, because I really don't feel like dealing with the nasty emails that follow when I do express a political opinion, but the fight this time is over healthcare spending and there is not likely to be a compromise before midnight, which is when the dough runs out.

From the Right... Senate Majority Leader John Thune said, "To me, this is purely a hostage-taking exercise on the part of the Democrats. We are willing to sit down and work with them on some of the issues they want to talk about, whether it's an extension of premium tax credits, with reforms, we're happy to have that conversation. But as of right now, this is a hijacking."

From the Left.... House Minority Leader Hakeem Jeffries commented, "There was a frank and direct discussion with the President of the United States and Republican leaders. But significant and meaningful differences remain. Democrats are fighting to protect the health care of the American people, and we are not going to support a partisan Republican spending bill that continues to gut the health care of every day America, period."

From the Center... Senator John Fetterman (D, Pa) opined, “I know there’s part of the base that really wants some kind of action, the fight, whatever that is. I do not believe that is the appropriate response to shut our government down at this point.”

Not Exactly Oktoberfest

The hunt for red October? Not exactly, though we've seen a few. One of my grandfathers, a musician by trade and a World War One U.S. Navy veteran, was ruined financially in October of 1929. My mother has a grainy picture of her dad among the throngs at the corner of Wall and Broad Streets in New York City from October 29th, 1929. Why were the throngs there? News of a stock market crash had spread across the city, verbally.

There was no internet. There wasn't television. There was some radio. Not everyone had one though. They had newspapers. Who was going to wait until the evening or the next morning for news when rumor has it that all is lost? I guess not my grandpa.

Then there was "Black Monday." October 19th, 1987. The day that would become "The Crash" for an entire generation. No circuit breakers. Just sell-orders. The Dow Jones industrial average, which was closely followed back then, as it had not yet been supplanted by the S&P 500 as the market's "go-to" index, gave up 22.6% for the day.

I was a traders' assistant working under the podium on the trading floor of the New York Stock Exchange that day. Right in front of Post 9, or what is today, CNBC's TV set. The tape ran more than two hours behind that day. That is something I can't forget.

Everything Was Manual

We took orders over the phone. We called the accounts back with their order fills. There were a few fights and few jobs threatened that day. There were errors made. Errors that cost millions of dollars. Errors that eventually did cost jobs. On a normal day back in 1987, the closing bell would ring at 4 p.m. in New York. The paperwork would wind up taking maybe 90 minutes. You were usually on the subway or in the bar by 6 p.m..

That day, we were all still doing our paperwork at our spots on the floor until 11:30 p.m. and beyond. I remember the Exchange wheeled carts of BLT sandwiches and Budweisers onto the floor to keep us going. That was interesting. We had to be back at work at 4 a.m. on Tuesday and basically, worked seven days a week, 18 hours a day for about three weeks. I was one of the lucky ones. I was still in the Marine Corps Reserve at the time. I got to go sleep in the woods on one of those weekends, which was a welcome break.

Everyone forgets the "Mini-Crash" of Friday, October 13th, 1989. That day became known as "Black Friday." We were still manual. The junk bond market collapsed after a leveraged buyout of United Airlines  (UAL)  failed. The entire marketplace got hit hard. The Dow Jones industrial average gave up 6.91% that day. This day is often looked back upon as the start of the recession of the early 1990s which is the reason the elder George Bush was a four year president and the reason why you've all heard of Bill Clinton.

There were also October stock market crashes in 1997 and 2008. Now, those were not single day crashes. There were circuit breakers in place by then and the business of trading stock had become more automated, so those crashes did not feel the same to those in the financial industry, though many Wall Street jobs never returned after 2008. As for the impact upon Main Street, that crash of 2008 needs no further explanation.

Reality

The reality of it all, though we have suffered through our wildest, most volatile markets in October, is that October, historically, is not a negative month. While October is the final month of the "Sell in May and go away" adage, with investors returning for November, perception is not fact.

According to the Stock Trader's Almanac, since 1950, the S&P 500 has averaged a return of 0.9% for the month of October despite having to average in some rather grotesque losses. Over those 75 Octobers, 44 or 58.7% have finished in the green for the period. Even better, in post-election years, which this year is, the average return improves from 0.9% to 1.3%. What could possibly go wrong?

Active Monday

I did not expect an increase in Trading volume on Monday, but that's what we got. keep in mind, while trade did increase on a day-over -day basis on both Monday and Friday, trade for those two days was still down from last week's levels, which included a three day losing streak. On Monday, of the 11 equity indexes that I monitor closely, the Nasdaq Composite was the big winner with a gain of just 0.48%, while the big loser was the S&P Midcap 40 at -0.2%. The S&P 500, because we cannot leave it out, gained 0.26% for the session.

Ten of the eleven S&P sector SPDR ETFs closed out the regular session on Monday in positive territory, led by Tech  (XLK)  and the Financials  (XLF) , both gaining little more than one half of one percent on the day. Energy  (XLE)  was beaten like a rented mule on Monday, giving up a gnarly looking 1.84%.

As for breath, Monday was largely meaningless. Winners beat losers at the Nasdaq by a rough 5-to-4 margin. Advancing volume took a 62.2% share of the composite while aggregate trade increased 6.6% over Friday's levels. However, at the NYSE, losers beat winners by a smidgen, as advancing volume took a 53.3% share of the composite and aggregate trade increased by 5%.

Bottom line? Wear your helmet today. Buckle your chinstrap. Wear your body armor. Carry water and clean socks. Keep your gas mask close. Most importantly, keep your cool.

Did You Hear?

Etsy  (ETSY)  is planning to transfer its listing from the Nasdaq to the NYSE in two weeks. That might have made sense in the old open outcry days, but now, switching from one electronic, algorithm dominated exchange to another? It can't be about listing fees. Can it still be about prestige? In 2025?

Question

A reader asks... "I am sure you’ve discussed this at some point in a past article and I just missed it, but what are your 'hard and fast' rules for position sizes in terms of the overall portfolio?"

Answer

I don't know that I have a hard and fast rule for this. In building an investment as well as getting out of one, I like to move in eighths. Maybe that's the old floor trader in me. What I am saying is that I trade in increments. Now, this can often mean that a stock will move, especially these days away from where I am willing to buy it or sell it before I am at my fully intended allocation size.

Hence, this can sometimes turn intended investments into trades. The important thing is to not let intended trades turn into investments. Dollar cost averaging is only OK when it is intended. We never let a mistake become an investment just because it goes against us.

As for allocation size, I like to move in percentage terms. I often run between 30 and 40 open positions on my most active book. That said, I am perfectly fine allowing my top five holdings to equal as much as 30% of my book's value as long as that book is less than 1/3 of my total investable worth. I will let my top ten holdings reach 50% of my book again as long as my book is less than 1/3 of my invested value.

What I mean by that is that I split my investable funds in thirds. This is after my allocation to precious metals which is always between 5% and 10% off the top. I don't include real estate. Back to those investible funds. I run one third of my overall portfolio. I hire two managers to also run 1/3 of my overall portfolio each. I rebalance at least twice a year.

As long as they don't screw up, I don't interfere, and I don't have input below the strategic level. I let them proceed on a tactical level until I notice that one of them is significantly underperforming expectations. One of them will always be instructed to focus more on fixed income than equity, so I do not expect the world. The idea here is to protect myself and my loved ones from the possibility that all three of us might see the world the same way at any given time and make very similar mistakes.

Economics 

(All Times Eastern)



08:55 - Redbook (Weekly): Last 5.7% y/y.



09:00 - Case-Shiller HPI (Jul): Expecting 2.3% y/y, Last 2.1% y/y.

09:00 - FHFA HPI (Jul): Expecting 0.1% m/m, Last -0.2% m/m.

09:45 - Chicago PMI (March): Expecting 41.4, Last 41.5.

10:00 - CB Consumer Confidence (Sep): Expecting 95.4, Last 97.4.

10:00 - JOLTs Job Openings (Aug): Last 7.181M.

10:00 - JOLTs Job Quits (Aug): Last 3.206M.

4:30 p.m. - API Oil Inventories (Weekly): Last -3.821M.

The Fed 

(All Times Eastern)

1:30 p.m. - Speaker: Chicago Fed Pres. Austan Goolsbee. 

7:10 - Speaker: Dallas Fed Pres. Lorie Logan.

Today's Earnings Highlights 

(Consensus EPS Expectations)

Before the Open:  (PAYX)  (1.20)

After the Close:  (NKE)  (.27)

At the time of publication, Guilfoyle had no position in any security mentioned.