October Ended Like it Started

The first month of the fourth quarter is now history. And while October was one for the history books in terms of gains, it ended pretty much the way it started: with a big decline.

October 3rd was the first trading day of the month, and the S&P 500 dropped 32 points. Yesterday, October 31, the S&P 500 dropped 32 points. Coincidence? Absolutely.

Yesterday's decline may have been sharp, but we can't say it's a surprise. Nor can we can say it's a bad omen. Not yet at least. The last day of October is the end of the fiscal year for many mutual funds. After a volatile summer, many mutual fund managers have likely underperformed. Given the recent bounce back for stocks, it's no surprise to see a little profit taking.

On top of that, the S&P 500 made a beeline for support at 1,250. That move very nearly erases the day of euphoria that followed the EU announcement about Greek debt forgiveness and Euro-bank recapitalization. That may not be a bad thing.

The EU debt plan is not complete, especially when it comes to bank recapitalization. Word is that many of these banks think they can meet the new requirements by employing some accounting tricks (where have we seen that before?). The amount of real money that's actually raised could be a fraction of what's required.

So while the relief was understandable, and any day of reckoning has been pushed off into the future, we didn't get full resolution. So I have no problem giving that day's gains back.

But I'm not ready to forget that earnings have been good and economy has improved to the point that no one is talking recession as they were up until late September.

Japan intervened in the currency market to support the yen yesterday morning. That amounts to a sneak attack on the dollar that no one was expecting. As we know, when the dollar rallies, stocks tend to sell off. And resources suffered much of the pain yesterday.

The energy sector dropped 4%, but oil out performed and held above the $90 level that I've suggested is something of a line in the sand.

Financials were the second worst performing sector, down just shy of 4%. Bank of America (NYSE:BAC) was the worst of the bunch, down 7%.

Now, I mention financials, and BofA in particular for comparative purposes. I discussed at length how financials led the recent rally. We also know that financials were the worst performing stocks during the July-September period.

But volume at BofA was about double the daily average during last Thursday's EU deal rally. Yesterday, it was less than the daily average. Granted, this is just one day's worth of data, but we've clearly seen a high volume rally and a low volume decline.

It will be important to see stock prices stabilize soon or we might actually get the steep sell-off I was concerned about before the EU debt deal was done.

Write me anytime: [email protected]

To top