The stock market has likely bottomed this week and could stage a 15% rally, according to Fundstrat.The firm highlighted favorable seasonal trends heading into the fourth quarter, as well as depressed investor sentiment.”Risk/reward certainly favors betting on an above-average bounce in the ‘Bear Killer’ month of October,” Fundstrat said. Loading Something is loading.
The stock market has likely found its bottom this week and should stage a rally of up to 15% heading into year-end, Fundstrat’s technical strategist Mark Newton told clients in a Monday note.
The bullishness from Newton is derived from a combination of favorable seasonal trends, depressed investor sentiment, and a strong market bounce so far this week.
Mid-term election years bode well for strong stock market performance in the fourth quarter, based on historical data. The average stock market gain in the month of October alone is 1.0% during mid-term election years, compared to just 0.3% in all other years, according to Newton.
And investors are no longer as bullish on stocks like they used to be amid the near-25% decline in the S&P 500. That can serve as a powerful contrarian indicator of a bottom when sentiment hits extreme levels. The weekly AAII investor survey has started to flash those bearish extremes in recent weeks, with the survey registering its fourth most bearish reading on record, and the CNN Fear and Greed Index remains in “Fear” territory.
“I’m betting that markets are higher between now and year-end, and Monday’s bounce should allow this week to produce a good trading low with any further downside likely proving limited for now given such rampant pessimism and oversold conditions,” Newton said.
“Overall, I think that the risk/reward certainly favors betting on an above-average bounce in the ‘Bear Killer’ month of October,” he added.
Newton is referencing the fact that the S&P 500 has made nine major bottoms in the month of October since 1932, which is considerably more than any other month of the year.
He believes the S&P 500 could rally as much as 15% into year-end, which would put the index just over the 4,200 level based on Monday’s closing price. The technical analyst added that any dips between now and year-end “should prove buyable.”