INSIGHTS

On October 31, 2022

AAM Viewpoints — Octobers Past, Present and Bullish

Recalling the October 19, 1987 stock market crash is significant this year for a few reasons. On that historic day in 1987, the Dow Jones Industrial Average (DJIA) slid 22.6%, or the equivalent of nearly 7,000 points based on today’s levels. That one-day percentage slide is equivalent to the year-to-date losses for the S&P 500. The 1987 decline was the embodiment of climactic panic and a textbook example of capitulation. Prices collapsed and an environment of hopelessness prevailed. The CBOE Volatility Index (VIX) did not exist in 1987 (VIX was established in 1993). Had the VIX been trading, it likely would have soared to a record high, not broken since. The question has been raised lately as to how and when the 2022 market downturn will finally end. There is a camp that believes there should be a bellwether event such as capitulation. In my view, that possibility passed months ago. More likely, the market may have already begun to establish a decisive base – a process that subtly took form months ago.

October has a well-documented reputation for tumultuous volatility, but it is also a month that has ushered in sea changes in market psychology. After the dramatic reversal on October 13 when the DJIA momentarily touched a yearly intraday low, the market adopted a narrower trading range. The VIX — dubbed the “fear index” — engaged in a persistent downtrend with limited price swings. Also, downward momentum braked for even some of the more aggressive growth sectors and themes while sectors such as Aerospace/Defense, Agriculture, Consumer Staples, Energy, Industrials and Materials exhibited steadily improving relative strength. This bolsters my conviction that we may have struck a reliable bottom. Given the fact that the market has had more than nine months to react to, and digest, the Federal Reserve’s aggressively hawkish monetary policy, it would seem that time is on the side of the bulls.

The increasingly resilient market tone may soon become more widely recognized, which could further drive greater buying conviction.

Through much of this year the market has been daunted by negative events on the economic, geopolitical and monetary fronts. Recent market behavior, however, suggests investors may have substantially discounted most of these headwind factors. I contend the best means of evaluating the market is from a bottom-up perspective. On that basis, an increasing number of stocks, sectors and themes are showing improving price architecture, positive net money flow trends and relative strength strides.

This may mean that any hints of glad tidings on the economic and monetary fronts could spur substantial and sustainable gains. The stage may be set for a year-end rally that catapults the broader stock indices higher and establishes a launching platform for a strong start to the new year.

CRN: 2022-1003-10366 R