"October is a horrible month" Frances Horodelski

October is a horrible month
The chase by Frances Horodelski:

Top stories on BNN.ca
Canadians paying down mortgages at a much faster rate than expected
Oil producers face price war over slowing global demand
Second Texas healthcare worker tests positive for Ebola

On this day, 60 years ago, a storm made its way through Toronto. It wasn’t just any storm – it was a Hurricane named Hazel. By the end of it all that month in 1954, 81 people were dead and more than $1 billion in damages was incurred. October is a horrible month.

If you’re wondering, in the U.S., 10% corrections do not always become 20% bear markets. According to the data, there have been 27 corrections of 10% while there have been only been 12 bear markets since WWII. Of course, this is for the S&P 500. On the TSX, on average each of the seven bull markets since 1950 have had three corrections. From where do we mark the beginning of this bull market? Do we use the bottom in March of 2009 or after the 21% decline in the October 2011 lows. Since the latter, there has been one classic correction (down 11% in 2012) and another just under 9% drop. We’re down from 10% from the September 3rd high.

The other major story for Canadians is the drop in the price of oil. Why? Well, the Saudis don’t particularly care to be the disciplined producer right at the moment as they are focused, as some say, on giving pain to Vladimir Putin or getting back at the Americans for perceived injustices. Others suggest that those who play with paper barrels (that is, the non-commercials) have been out of the game with the short position on Brent, for example, the highest in three years and speculative longs collapsed (thank you Sprott’s Eric Nuttall). Right now we are in a shifting season of seasonality, and sentiment on oil has plunged (Bloomberg’s bullish sentiment now only 29%, bears 50%). Demand numbers are actually stronger than most would think from the price and the sentiment. This is a topic of conversation all day for BNN. Energy stocks make up 23.7% of the weight of the TSX and was 27.2% when the sector peaked in June. They are technically in bear territory down 20.13% versus its June 16 peak. Wilbur Ross – where are you?

In the news, Toyota recalling 1.75 million cars, Shire crashing as AbbVie is looking to reconsider its offer at an October 20th board meeting, Bank of America reported its results when adjusted for this, that and the other thing (legal items mostly), the earnings came in at 42 cents versus last year’s 20 cents. The stock is higher by 0.8% in the pre-market. BlackRockreported a big beat ($5.21 versus $4.66). After the close eBay, Netflix, Eli Lilly and American Express will be in focus. So far, the earnings season is calm and better than expectations including last night’s CSX and Intel reports. Hewlett-Packard is back in the market with their buyback program putting an end to speculation on who they might be interesting in buying (remember, the company had halted its program due to the possession of material, non-public information). A new “acting” CEO has been appointed at Sears Canada. The CFOs at BCE and at Pembina Pipelines are retiring.

For those watching the entrails of the markets, here are some data points: high-low, advance-decline and percentage of stocks trading above the 50-day moving average is well into oversold territory; there has been a big spike in the number of stocks trading with 14 day RSI below 30 and according to Bespoke, 63% of the S&P 500 is oversold, the highest in more than one year. For the TSX, 115 of the 251 components have an RSI below 30 while only 15% of the stocks are now above the 50-day moving average. While these conditions can get worse or be ameliorated by a sideways move, we are in the eye of the storm. Technical analysts are looking to 2% on the U.S. 10-year treasury which may have to be reached to see some allocation shifts back to stocks, but geesh, 2% - the same guys were calling for 3.25% at the beginning of the year! Ultimately, low rates do help the valuation support on stocks – especially since so far, earnings aren’t bad. The Q3 earnings growth rate is estimated at 6.5% (excluding Bank of America +7.7%) while European earnings are expected to be up 11-12% (yup, up!).

The futures are accelerating to the downside as traders and investors respond to margin calls, Ebola worries, oil weakness, seasonality, some M&A unwinding, global growth concerns and every worry one can think about (including weak retail sales, a sloppy Empire Manufacturing print, and below estimates producer prices). We’re getting closer but we’re not there yet according to the futures. A 10% correction on the S&P 500 brings us to 1810.