October’s Downturn in Stocks Suggests We Are in Risk-Off Mode

October was an ugly month for stock indices around the world and the domestic ones were no exception. The four main U.S. indices all dropped significantly, and eight of the 10 main sectors moved lower. The few sectors and asset classes that moved higher in October are all considered “defensive” investments.

Looking at the indices first, we see that the Dow lost 5.07% during the month and that is its worst monthly loss since August 2015. The S&P dropped 6.94% for its worst loss since September 2011. The Nasdaq suffered a monthly decline of 9.2% for its worst loss since November 2008. The Russell suffered the worst loss at 10.91% and like the S&P that was the worst loss for the Russell since September 2011.

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As for where these four stand with regard to their long-term moving averages, the Dow managed to remain above its 12-month and 24-month moving averages. As for the other three, they all three closed below their 12-month moving averages and above their 24-month moving averages.

Turning our attention to the sectors, the only two sectors that gained ground in October were the utilities sector and the consumer staples sector. Consumer staples gained 2.0% while utilities gained 1.98%. Both of these sectors are considered defensive sectors—investors turn to them when they want to lower risk.

The energy sector suffered the worst loss, dropping 11.33% during the month. The industrial sector was the second worst performer with a decline of 10.87% and the consumer discretionary sector dropped 10.1% as the third worst. The tech sector garnered a lot of attention as it dropped sharply on a couple of days, but the loss for the month got trimmed to 8.0%.

Among other asset classes, there was somewhat of an anomaly to the monthly performances. Gold gained 1.57% during the month of October and the U.S. Dollar gained 2.28% during the month. These two very rarely move in the same direction.

Ten-year treasury notes dipped slightly during October and that led to a slight increase in the rates. Remember the inverse relationship there—when bonds fall rates rise and vice versa. Oil dropped 10.84% in October and that was after two straight months of gains. Oil seems to be settling in to a range between $65 and $75 for now and that comes after it gained ground in nine out of 12 months from July ’17 to June ’18.

When you add all of this information together—the Dow suffering the smallest loss among the indices, consumer staples and utilities leading the sectors, and gold and the dollar gaining ground at the same time, it all suggests that investors are taking a more cautious approach at this time.

We have seen stocks bounce back in the last few days of October and some investors may be using the selling throughout the month as a buying opportunity. November could be an important month. When I looked at the monthly chart of the S&P and looked at the last two bear markets, once the index fell below its 12-month moving average, it had flat month the next month. The S&P dropped below its 12-month in September 2000 and then October was flat. Then November saw more selling and the index dropped below its 24-month moving average.

In 2007, the index dropped below the 12-month in November and then December was flat. The selling resumed in January ’08 and that is when the index fell below its 24-month.

There are a lot of events that could change the course of the market during November. The midterm election results will certainly have an impact and the next round of trade talks with China are weighing on the minds of investors. If we see a big bounce in November, that would be a small relief. If we see a flat month, I will be watching December even more closely.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.