October 2022 was the best month for the stock market since January 1976.
The Dow Jones Industrial Average (DJIA) gained more than 14% in October.
It was a bear-crushing rally.
And it has raised the hopes of bullish investors as we head into the seasonally bullish period of November and December.
Please allow me to crush those hopes…
Think about how things looked one month ago.
At the end of September, the S&P 500 was trading near 3600 – down from 4300 just six weeks before. That 16% decline created extremely oversold conditions across several key technical indicators.
We pointed out how that sort of setup often leads to at least a short-term bounce. And that’s what we got in October.
But now, conditions have shifted. The key technical indicators that pointed to a bounce last month are now extremely overbought and are warning of a decline.
Take a look at the McClellan Oscillators for the NYSE and the Nasdaq (NYMO and NAMO)…
These are momentum-based indicators that help determine overbought and oversold conditions.
Readings of more than 60 indicate severely overbought conditions and often precede large declines in the markets. Readings of less than -60 express extremely oversold conditions and usually lead to strong bounces in stock prices.
Both indicators closed in extremely overbought territory last Friday.
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This is the fifth time in the past year that both the NYMO and the NAMO have been above 60 at the same time.
Now, here’s how the S&P 500 performed after the four previous times…
The market fell almost immediately following all four of the previous setups.
The setup in mid-July led to only a brief, short-term pullback – lasting about one week. The S&P 500 then went on to rally about 10% over the next month into a significant top in mid-August.
In the other three previous cases, though, the S&P 500 declined sharply for several weeks – losing, on average, about 700 points.
It’s quite possible we’ll see something similar happen this time as well.
Traders who bought in late September in anticipation of an oversold bounce should consider taking some profits off the table here.
Folks who are looking to put money to work in the market right now, in anticipation of a rally into the end of the year, should probably consider holding off for a bit.
We’ll likely have a better buying opportunity in the weeks ahead.
Best regards and good trading,
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Jeff Clark
P.S. Tomorrow evening, I’ll be coming forward with my most timely warning yet, but this time it’s not a prediction… this massive event is guaranteed to happen.
Many popular stocks could freefall overnight and many people could see their portfolios get slaughtered…
But if you’re prepared when the event hits, then this could be your best chance to recoup all the losses you suffered this year. So, join me for my special presentation tomorrow at 8 p.m. ET where I’ll reveal what to do with your portfolio. Just click here to reserve your spot.
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