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Get Your Facts Straight On October - Morning Market Squeeze

Key Tactical Takeaways:


> SPX closed > its bearish NT stop at 3351.6, but in rather unconvincing fashion. If we get follow-through confirmation, preferably a Friday close > this stop, look for a short-squeeze to retrace much of the Sep decline ahead of the 2nd half of the correction.


> Given the subtle credit spread widening of late, we think HYG is an important piece of the risk puzzle here. HYG is now struggling to close above its bearish stop at..., which is also the area of the "double top" neckline that it crashed below on 09/21.


> After Senator McConnell’s downbeat stimulus comments threw cold water on the Wednesday rate surge that was ignited by Secretary Mnuchin's earlier comments, the 10-Yr remains locked between nearly converging range triggers at ...% and ...%.


> October's favorable historic returns are greatly depressed during election years (see page 8 for more detail).


Some Quick Thoughts:


In this final stretch to the presidential election, no one should be surprised by the fact that key members of the sitting administration will pull out all the stops to win favor. Secretary Mnuchin understands the positive effect that combining key terms like "optimistic" and "stimulus" can have on the algos. Amazingly, the timing of comments such as those uttered by the Secretary ahead of his Wednesday meeting with House Speaker Pelosi always seem to come around key levels in the market. Yesterday's comments just happened to come as the SPX was about to challenge the critical bearish NT Trailing Stop at 3351.60. 


By most accounts, a new round of stimulus is not expected to pass prior to the election. It makes no sense for Democrats to hand Republicans such a victory ahead of the election. Senator McConnell pretty much confirmed this when he came out later in the session to throw cold water on the Secretary's earlier comments by stating, "We are very, very far apart," when it comes to the two dueling parties trying to hammer-out a deal. By Wednesday's close, SPX did close above the aforementioned stop, but only by a trivial measure. At the same time, HYG struggled to close above its bearish stop at ..., which is also the area of the "double top" neckline that it crashed below on 09/21. We think HYG is an important piece of the risk puzzle here, because of the subtle credit spread widening of late.


Depending on where you begin your backtest, September is among the worst months of the year for stocks. With September 2020 now in the books as having the worst decline (-3.8%) since September 2011, we move on to a month known for having favorable returns. Again, though, depending on how you measure these returns goes a long way in setting expectations. Since this is an election year, it’s important to highlight that October's performance is far less optimistic during these windows than when measuring its monthly performance over all years. These results are shown on the right-hand side of the Event-Driven Stats page on page 8.


Bottom line, we remain bullish on the long-term as we know that unprecedented measures of monetary market manipulation is the only game in town. However, we also respect that this early-October window is where we tend to see a seasonal bounce ahead of a difficult mid-late October during election years. Therefore, if we get the follow-through confirmation we're looking for from SPX and HYG, we'll look for a short-squeeze to retrace much of the September decline ahead of the next weak phase of the post-09/02 correction. Currently, the short and near-term bull stops for SPX are at ... and ..., respectively. 


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