Weekly Market Analysis – 29 October 2018 BMO

WEEK IN REVIEW – 22 to 26 OCTOBER 2018 :
The Bears Have It Good This October

The Bulls are saying that the stock market just had another terrible, horrible, no good, very bad week, filling in some more blanks on what has been a terrible, horrible, no good, very bad month.

Just how bad has it been?  The Russell 2000 is down 12.5% in October; the Nasdaq Composite is down 10.9%; the S&P 500 is down 8.8%; and the Dow Jones Industrial Average is down 6.7%.

The Bears aren’t complaining. In fact, this has been way overdue and the Bulls are paying back just a little bit compared to what they’ve enjoyed from the over-extended season of gains from the last nine years.

The thrust of matters is that the market is worried about growth.  That might sound odd considering it was revealed on Friday that third quarter real GDP increased at an annual rate of 3.5%, yet it is the sobering message that has resonated loud and clear in the stock market’s price action.

The worry isn’t about the growth that was just left behind.  Rather, it is about the growth to come – or perhaps lack thereof.

There are various explanations regarding the causes of the stock market’s correction: the adverse effect of a strong dollar; the slowdown in China and other foreign markets; tariff issues, raw material price increases; political uncertainty; diplomatic uncertainty; price increases for consumers; rising interest rates; and profit margin pressures.

Ultimately, they all feed into the one thing that matters most for the stock market: earnings growth.

The clearest evidence that the stock market is wrapped up in worries that future earnings growth won’t live up to expectations is in the third quarter earnings results.  They have been quite impressive. 

According to FactSet, the blended third quarter earnings growth rate is 22.5%, up from 19.3% on September 30.  What’s more is that the forward 12-month EPS estimate has increased by 0.8% over the same period.

Analysts, then, aren’t marking down their estimates, yet investors are marking down stock prices sharply, believing those estimates are destined for a downward revision in due time as the effects of tariffs, higher interest rates, and higher operating costs kick in just as the initial thrust of the tax cuts gets kicked out and earnings comparisons become more difficult.

The quantitative result is that there has been a compression in the forward twelve-month P/E ratio to 15.5, versus 16.8, at the beginning of the fourth quarter, according to FactSet, as prices have dropped sharply while the earnings estimate has drifted higher.

Even so, there hasn’t been a concerted effort yet to buy into the weakness, which has been unsettling for investors who have grown accustomed to the stock market, and particularly the mega-cap growth stocks, always bouncing back in confident fashion.

The recognition that any strength has been viewed as an opportunity to sell has shaken investor confidence and has contributed to selling efforts on the part of investors trying to secure profits in crowded trades before they disappear altogether. 

That would take some time yet for anyone buying at the start of this bull market.  To wit, the S&P 500 is still up nearly 300% from its low in March 2009; nevertheless, the ugly price action of late in key leadership stocks (i.e. the FAANG stocks), key leadership groups (i.e. information technology, communication services, consumer discretionary, financials, and industrials), and the major indices has upset the balance of confidence in the stock market.

That all came home to roost in the week that just concluded. 

There were some good reports to be sure and some encouraging reactions to those reports.  Microsoft (MSFT), Tesla (TSLA), Twitter (TWTR), Intel (INTC), and Boeing (BA) come to mind. 

However, the stock market wasn’t governed by their good news.  It was governed by the disappointing guidance from the likes of Caterpillar (CAT), 3M (MMM), Texas Instruments (TXN), Amazon.com (AMZN), Alphabet(GOOG), Mohawk Industries (MHK), Colgate-Palmolive (CL), and Western Digital (WDC) to highlight a few examples.

Nothing cured the stock market this week, because none of its bugaboos got cured.

It is sounding like the trade war between the U.S. and China could be a prolonged one; Italy sounds as if it is thumbing its nose at the EU’s request to revise its budget; Saudi Arabia’s explanation for how Washington Post columnist Jamal Khashoggi died had obvious signs of being a cover up; Brexit negotiations have hit another impasse; the U.S. dollar strengthened; and, perhaps most importantly, Federal Reserve officials continued to make their case for why they think further rate hikes are warranted.

The latter is a central component of why the stock market is wrapped up in growth concerns.  It is bothered by the idea that the Federal Reserve is going to raise rates too much, too soon, and choke off the U.S. economy’s growth trajectory at a time when foreign economies, namely China and Europe, are already slowing down.

The translation heard from the lips of many pundits is that there is a fear of the Federal Reserve making a policy mistake.

Again, though, that gets back to earnings growth concerns, which have fueled broad-based de-risking in the stock market.  All 11 sectors in the S&P 500 ended lower in the week just concluded.  The real estate sector fared the best with a 1.0% decline while the energy sector fared the worst with a 7.1% decline.

There was nowhere to hide other than in cash and risk-free Treasuries.  Yields fell across the curve. The 2-yr note came down 11 basis points to 2.81% and the 10-yr yield dropped 12 basis points to 3.08%.

The fact that the stock market found little comfort in the drop in market rates was a telltale sign that it was a terrible, horrible, no good, very bad week for the bulls caught up in a correction driven by earnings growth concerns.

(Economic Excerpts from Briefing.com)


Wednesday 24 October:

October U.S. Markit Manufacturing PMI- Prelim 55.9, Prior 55.6; Services PMI- Prelim 54.7, prior 53.5

Stronger overall business activity growth was driven by the service sector in October, which more than offset a slight loss of momentum in manufacturing. Higher levels of business activity were supported by another sharp rise in new work. Survey respondents noted that improving domestic economic conditions were the main factor behind rising client demand. Robust new business growth placed additional pressure on operating capacity in October, as highlighted by another modest accumulation of unfinished work. Payroll growth remained solid as firms continued to expand capacity, though the rate of private sector job creation eased to its slowest since June 2017

New Home Sales a Real Dud in September

New home sales declined 5.5% month-over-month in September to a seasonally adjusted annual rate of 553,000 (consensus 625,000).  That was the weakest pace since December 2016 and it followed on the heels of a sharp downward revision for August to 585,000 (from 629,000).

The key takeaway from the report is that it underscores how demand is being impacted by rising mortgage rates.  Median and average home prices were both down year-over-year, yet that didn’t seem to provide much of a lift for new home sales.

Thursday 25 October:

Durable Orders Exceed September Estimates

Durable Goods orders for September increased 0.8% (consensus -1.8%) after a revised 4.6% increase (from 4.5%) in August. Excluding transportation, durable goods orders increased 0.1% (consensus 0.3%) after a revised 0.3% increase (from 0.1%) in August.

The key takeaway from the report is that the headline increase was driven by growth in transportation equipment orders and defense aircraft and parts orders while growth in other areas was more of a mixed bag.

Initial Claims Remain Near Multi-Decade Lows

Initial claims for the week ending October 20 increased by 5,000 to 215,000 (consensus 211,000). Continuing claims for the week ending October 13 decreased by 5,000 to 1.636 million, which is the lowest level since August 4, 1973.

The key takeaway from the report is that the trend of steadily decreasing initial and continuing claims has been uninterrupted by today’s report.

Friday 26 October:

Consumer Spending and Inventories Puff Up Q3 GDP

Real GDP increased at an annualized rate of 3.5% (consensus 3.3%) while the price deflator checked in at a lower-than-expected 1.7% (consensus 2.1%).

The key takeaway from the report is that real final sales of domestic product, which subtracts the change in private inventories, were up just 1.4% – the weakest growth rate since the fourth quarter of 2016.

Consumer Sentiment Eases in October, but Still High

The final October reading for the University of Michigan Index of Consumer Sentiment was 98.6, down slightly from the preliminary reading o 99.0 and the final September reading of 100.1.

The key takeaway from the report is that consumer sentiment has not been unduly affected by the stock market sell-off or the jump in interest rates.  The outlook for consumers is still rooted in feelings about job security.


Friday 26 October
S&P 500 Tumbles as Amazon, Alphabet Disappoint

The S&P 500 lost 1.7% in a volatile session on Friday, in which it never touched positive territory. Disappointing earnings reports from Amazon (AMZN) and Alphabet(GOOG) rattled a fragile market pestered by peak-earnings concerns.

The benchmark index briefly dipped into correction territory, characterized by a 10% pullback from a prior high, before it took a sharp turn upwards in late morning trading. Nevertheless, the comeback proved futile, as stocks eventually rolled over again. The 11 S&P 500 sectors all finished lower.

The Dow Jones Industrial Average lost 1.2%, the Nasdaq Composite lost 2.1%, and the Russell 2000 lost 1.1%.

A stronger-than-expected advance Q3 GDP reading (+3.5% actual vs +3.3% consensus) took a backseat in Friday’s trading action to Amazon lowering its fourth quarter revenue guidance and Alphabet missing third quarter revenue expectations. The encouraging headline GDP figure, though, was tempered by the understanding that real final sales, which exclude the change in private inventories, increased just 1.4%, marking the slowest growth rate since the fourth quarter of 2016.

Amazon and Alphabet weighed heavily on the underperforming consumer discretionary (-3.6%) and communication services (-2.4%) sectors, as their disappointments filtered through to other growth stocks, which have been beaten down sharply this month on valuation concerns.

Facebook (FB), Netflix (NFLX), and Apple (AAPL) also backpedaled from notable gains in the previous session, adding pressure to the communication services and information technology (-1.9%) sectors.

In other earnings news, Mohawk Industries (MHK), Western Digital (WDC), and Colgate-Palmolive (CL) contributed to angst over future earnings growth.

Flooring manufacturing company Mohawk cited weakening demand, inflation, and pricing pressures for its lower outlook; Western Digital said customers are being more conservative, resulting in softening demand; and Colgate-Palmolive encountered profit margin pressures from higher raw material and packaging material costs.

Conversely, Dow component Intel (INTC) easily beat consensus revenue and EPS estimates for the third quarter and issued fourth quarter guidance that exceeded analysts’ average estimates. Shares of the chip maker finished 3.1% higher.

U.S. Treasuries prices rose, as the market turmoil drove some safe-haven positioning. The 2-yr yield decreased five basis points to 2.81%, and the 10-yr yield dropped six basis points to 3.08%. The U.S. Dollar Index traded 0.3% lower at 96.37, though not far from its two-month high.

Overseas, markets closed on a downbeat note amid the early negative price action in the U.S. market.

Market Internals – Friday 26 October 2018

Dollar: Index Backtracks From August High

The U.S. Dollar Index closed down at 96.32 after surrendering a modest early Friday-morning gain. The Dollar Index climbed during the European session while European equities faced early selling pressure. The Index marked a session high (96.86) just below its high from August (96.98), but backed off its best level of the session as European equities and the euro rebounded. The Dollar Index booked its second consecutive weekly advance, having climbed 0.8% since last Friday.

Bonds: Treasuries Climb as December Rate Hike Odds Recede

U.S. Treasuries ended the week with gains across the curve. The cash session started with solid gains after Treasury futures rallied amid another weak showing from equity markets in Asia and Europe. Treasuries backed off their starting levels after the release of a slightly stronger than expected advance GDP for the third quarter (actual 3.5%; Briefing.com consensus 3.3%), but that pullback was short-lived. Treasuries overtook their opening levels during a mid-morning push, which coincided with more selling in the stock market. The Treasury complex marked session highs around 11:00 ET, as equities were hitting their lowest levels of the day. Midday action saw Treasuries backpedal to their starting levels while equities reclaimed some of their losses. The recent weakness in stocks and the corresponding bounce in Treasuries have curtailed expectations for a December rate hike, but Federal Reserve officials have not hinted at any imminent changes to the policy course. The implied probability of a December hike declined to 70.3% from 77.1% yesterday and 83.8% one week ago, according to the fed funds futures market.

The yield curve fell across the board with the sharpest drop along the belly of the curve in a steepening move. The spread between the 5s10s widened to 17bps from 15bps the previous week while the 10s30s widened to 24bps from 18bps the previous week. 


The Bloomberg Commodity Index settled at 85.00, lower than 85.95 the previous week as oil, copper and grains lost ground.

WTI oil fell to $66.00 p/b before settling the week at $67.59. The spread between WTI and Brent narrowed to $10.03 from $10.66 the previous week as Brent settled at $77.62 p/b.

EIA petroleum data for the week ended October 19

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 6.3 mln barrels from the previous week. At 422.8 mln barrels, U.S. crude oil inventories are about 2% above the five year average for this time of year. Total motor gasoline inventories decreased by 4.8 mln barrels last week and are about 6% above the five year average for this time of year. Finished gasoline and blending components inventories both decreased last week. Distillate fuel inventories decreased by 2.3 mln barrels last week and are about 4% below the five year average for this time of year. Propane/propylene inventories decreased by 0.3 mln barrels last week and are about 4% below the five year average for this time of year. Total commercial petroleum inventories decreased last week by 8.0 mln barrels last week.

Natural gas inventory showed a build of 58 bcf vs a build of 81 bcf in the prior week. Working gas in storage was 3,095 Bcf as of Friday, October 19, 2018, according to EIA estimates. This represents a net increase of 58 Bcf from the previous week. Stocks were 606 Bcf less than last year at this time and 624 Bcf below the five-year average of 3,719 Bcf. At 3,095 Bcf, total working gas is below the five-year historical range

Baker Hughes total U.S. rig count increased by +1 to 1068 following last week’s increase of 4.

Metals: Precious Gain, Copper Corrects

Agriculture: Corn Consolidates, Wheat and Soy continue to fall



As of Friday’s close, the Shanghai Composite has lost -49.81% from its 2015 high of 5,178.19 and continues to dive deeper into Bear Market territory having lost -21.42% YTD and -23.73% YonY.

Singapore’s Straits Times Index (STI) closed at 2,972.02, breaking below its critical 3,000 support for the first time since January 2017. The STI is now down -12.66% YTD and -8.13% YonY and is digging deeper below its 200DSMA.

Japan’s Nikkei 225 gave up gains to slip 0.4 percent by the closing bell to 21,184.6 while the Topix index declined by 0.31 percent to 1,596.01.

South Korea’s Kospi dropped 1.75 percent to close at 2,027.15 while the Kosdaq index fell 3.46 percent to 663.07.

Australia’s ASX 200 closed near flat at 5,665.2, with the heavily weighted financial subindex up by 0.35 percent.

India’s Sensex lost 1.0%, widening this week’s decline to 4.0%.

Economic Data




November is the second month of Quarter Four and the end of Earnings Season for Q3 results. November starts the “Best Six Months” on the DOW and S&P and also begins the “Best Eight Months” on the NASDAQ

October 2018 has twenty (20) trading sessions, one half-day session and one public holiday. November 23 is Black Friday – the start of Christmas Sales. Black Friday is always the Friday after Thanksgiving. 

November Trivia


Week 44 (October 29 to November 02)

According to our 5, 10 and 15 year seasonal models;

Benchmarks Indices (21 year average) for wk44:

Week 44 Key Economic Dates

In the coming week, important releases for the US include the jobs report and unemployment rate, ISM Manufacturing PMI, personal income and spending and PCE prices.

Elsewhere: Interest rate decisions from the BoE and the BoJ; Eurozone Q3 GDP growth; China NBS PMIs and Caixin Manufacturing PMI; and UK budget announcement will also be in the spotlight.

Mon 29 October

Tue 30 October

Wed 31 October

Thu 01 November

Fri 02 November


Big Tech and Big Industrials dominate the coming week’s earnings schedule. Big Oil’s results then ends the second-most busiest week of earnings season.



S&P and Dow Jones closed in negative territory for the year.  The Nasdaq still remains positive on the year while Small & MidCaps have been negative since their aggressive breakdowns below their 200DSMAs early in the month.

All the technical signals have been triggered in the last two weeks with all four benchmarks closing the week below their 200DSMA to signal a Technically Bearish Market. All four benchmarks are also in Correction Territory as of Friday’s close, trading more than 10 percent below its record high reached in September.

Seven of the 11 S&P 500 sectors are down at least 10 percent from their 52-week highs, including energy, materials and financials. Around three quarters of the index’s stocks are also in a correction. At this rate, we’re likely to see the ultimate Death Cross (50DSMA crossing below the 200DSMA) within two weeks.

Even before October has ended, the DOW is already being threatened by its first bearish monthly MACD histogram. As you can see, the MACD histograms in this configuration rarely turns for little or no reason.


“I can’t see any reason for this technically bearish signal to be sustained. If we do get a few surprises that shock the market into lower lows, I will be ready as I have not changed my stance from the last two weeks. I am still not a buyer and will stay heavily hedged or short with tight stops.

That was really a good – and profitable – decision to stay hedged and bearish. 

Now as the market delves deeper into bearish territory, let’s see if the dip-buyers come back. Their failure to return will surely spark a further sell-off especially if the Bears stay stubborn and not cover their shorts. Should that happen, I’ll be expecting the yield curve to flatten in a hurry as more monies find a flight to safety amidst the aforementioned uncertainties; a strong dollar, the slowdown in China and other foreign markets, tariff issues, raw material price increases, political uncertainty, diplomatic uncertainty, price increases for consumers, rising interest rates, profit margin pressures and earnings growth.

Cleveland’s Fed Chair, Loretta Mester (Voting Member) said this week that the current volatility is “a natural thing” and I have to agree with her. (Read: Market turmoil is a “risk”) Such is the nature of October’s Earnings Season. The irrational fear of the October Effect especially against a backdrop of over-priced stocks will make any sensible investor nervous and twitchy.

So if this “natural thing” does the normal thing, we should be seeing a bottom very soon and be back on the way up by mid-November. I still maintain that the U.S. economy remains lofty with no damaging signs that would imply any economic weakness or failure for the next quarter or two. 

I remain bearish (but less so now) and heavily hedged on my longs. The coming week is only the second of three of the busiest weeks in earnings season. If you’re thinking of turning Bear now, you might just be a tad late. Stay safe and stay out – never chase the trend.

Happy Hunting!


For more than 12 years of educating, mentoring and supporting hundreds of participants (annually) in the arts and sciences of Finance and Economics, the Pattern Trader™ Tutorial has evolved to become the most sought-after boutique-styled class that caters to individuals, professionals and families that are serious about their finances and their prospects as we move into the future.

The small class environment and tutorial-styled approach gives the Tutorial a conducive environment that allows for close communication and interaction between the mentor and the participants.

The hands-on style makes the Tutorial very practical for anyone who requires a start from the ground up. It is the perfect beginning for anyone who wishes to take that first step in improving their financial and economic literacy.

If you’re looking to make a huge difference in your financial life and get the most value our of your education investment, there’s no better choice than the time-tested and well reputed Pattern Trader™ Tutorial

Download our promo slides here:
The Pattern Trader™ Tutorial 2019


The schedule for the FEBRUARY 2019 Batch is here:
Pattern Trader™ Tutorial – February 2019


Screen Shot 2017-10-01 at 1.38.39 PM

Connect with me at LinkedIn


If you enjoyed this post, please consider to visit Pattern Trader Tools, leave a comment or subscribe to the feed and get future articles delivered to your feed reader.


No comments yet.

Sorry, the comment form is closed at this time.