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Bad News is Good News? An October Reckoning
October is always the scariest months for investors. After all, the years 1929 and 1987 are ones the stock market would love to forget. Despite October's bad reputation, it still isn't as bad on average as September is when all is averaged out. This September has been another to buck the historical mean. However, this is a year that October might not fall within the averages.
Fear October.
That may be a bit strong, but when we analyze how the economic reports and financial news affect the market, we see an interesting phenomenon. Any bad news coming out now is spun into good news, referring to the foresight of the FED and its justification for a rate cut. Just read the Wall Street Journal or watch any number of financial news programs and they will echo the same. I have even read that all the bad numbers are good because it increases the chance for another rate cut. This has been rallying the market as of late, and we may even push ever further to break 14,000 once again, that is, until we reach what I call, "the scariest 3 days of October".
The 3 days spanning October 17th 18th, and 19th are ones to watch with increased scrutiny, critical to any trading strategy. This time period can act as a divining rod into what is to come in the next 18 months. It also has much more impact than the news today because there will be no excuses and no twisting the bad into good. The rate cut party will be long since over.
On October 17thh, being in the midst of earnings season, the market will have a vague idea how the economy is faring. Starting on the 17th, we will have earnings reports coming in from the Big Three . . . no, not the auto companies, the banks. Chase, Bank of America, and Citigroup, all report on the 17th,18th and 19th. If the big three miss their EPS estimates (1.02, 1.16, and 1.09 respectively), then it could prove to be a crushing blow to any bulls in the market. Why? These reports will let us gauge the continuing damage of the credit crisis and could either fuel a sustained rally or fuel a retreat. Banks can benefit from rate cuts, but it usually takes several months, far longer than the patience of a short term trader. If the big banks weather the credit storm and report less damage than expected, we could be looking good. If the Big Three miss projections, expect fear to rise. Fifth Third, Wachovia, and Wells Fargo are also reporting in this window, so there will be more than enough information available for us to analyze. If the numbers don't look good on the 19th, don't expect them to improve any time soon. If you tack those on to unfavorable unemployment or inflation numbers, it may be time to head for the exit.
There's nothing more fun than a really great party, but the hangover afterwards is directly proportional to the amount of fun you had. Cheers everyone.
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