A Rock, a Hard Place, and a Sledgehammer By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - What seasonality expects after a red October…
- The best and worst sectors over the past month…
- The latest Big Money buy signals…
- The Fed’s between a rock, a hard place, and a sledgehammer…
- Election chaos is serving up the best buying opportunity in months…
October closed red… And it’s thanks in large part to just one trading session last Thursday, the final day of the month. The S&P 500 fell about 2% from the previous close, wiping out October’s gain. The reason why, as always, is multifaceted. But shaky guidance out of Big Tech companies, which we covered Friday, seemed to be main culprit. This is only the second negative closing month of 2024 – the other being April, where “sell in May” came early. You can’t say we didn’t warn you about late-October volatility. Even as stocks held up well through what’s traditionally a rough patch during election season, seasonality doesn’t lie. Here’s our seasonality chart of the SPDR S&P 500 ETF (SPY) going back seven election cycles: 
On average, stocks have been negative through election-year Octobers about 75% of the time for an average loss of -2.73%. We were indeed negative this year, but thankfully by only about 1%. I want to turn your attention to the rest of the year, though. From today, November 4, through the end of the year, election years tends to see choppy but altogether positive trading action. Over seven election cycles, stocks have been positive 71.43% of the time and put up an average return of 1.5%. We can think of that late-October plunge as a great opportunity to buy stocks… with prices set to run moderately higher through year end – if we only look at election year seasonality. Looking at all-years seasonality for SPY, we get an even rosier picture: 
For the past 31 years, SPY has been positive from November 4 through the end of the year 77.4% of the time, for an average return of 2.89%. The takeaway is simple and clear: Don’t let the Halloween plunge scare you out of stocks. The Santa Claus rally is more than likely coming. The sector picture for October shows some unexpected strength… Last month, we showed you the sector winners and losers of September. Taking it a step further, we looked at which sectors had the best historical evidence for outperforming through the seasonally weak period in October. Topping the list were Materials, Consumer Staples, Utilities, and Financials. But what we got for the October close was a little bit different. This time, Financials wound up reigning supreme as one of the three sectors to post a positive return in October. Trailing it were Communication Services stocks and, surprisingly, Energy – which has been weighed down by falling oil prices as the Iran conflict has calmed down: 
Health Care stocks were the weakest in October, along with Staples, Real Estate, and Materials. While we’re at it, let’s check in on the year-to-date numbers… 
Communication Services stocks have unseated Utilities as the best sector of 2024, with a 28.46% return… and driven by their October outperformance. Financials also climbed to the No. 3 spot, as Information Technology got knocked down two pegs. Putting these two tables side by side can help us figure out which sectors to target as we head into year-end. Some of the weakest sectors year-to-date were also some of the weakest last month… making them places to avoid. Materials, Real Estate, and Health Care are those areas. At the same time, we saw strong outperformance in sectors that have dominated this year – namely in Financials and Communication Services. Utilities fell in October, but their relative strength for all of 2024 makes that look like a “buy the dip” opportunity. The latest Quantum Edge Hotlist comes at an interesting time… As we showed you on Oct. 25, Jason Bodner’s Big Money Index (BMI) recently fell out of overbought territory… That proved to be a valuable signal. As the BMI continued to fall, stocks churned sideways before finally plunging last Thursday. Here’s Jason with some words on the BMI he sent to his subscribers last week: Last Monday, we talked about how the BMI went overbought. That’s unusual in October, which is historically a tricky month for stocks.
Today, we talk about surprise No. 2: The BMI is no longer overbought. It stayed there just four days. You can see the BMI (amber line) quickly rise above and fall below the dotted red line that delineates overbought territory. 
Source: MAPsignals.com That dotted red line is 80%, which means that 80% of Big Money signals over the past month were buys. The BMI popped above 80 on Oct. 16, and was back down at 78.9 last Tuesday, Oct. 22. That’s six calendar days but four trading days.
Four days in the overbought zone is unusual. The historical average is 22 days, based on 73 prior occurrences since 1990. But four days is also not unheard of. In fact, 20% of those previous instances lasted four days or less. Jason goes on to clarify the nuances of what makes up the BMI… The BMI did not fall because of a spike in selling. Check out the chart below, and you can see the red bars that indicate unusually heavy selling are still shorter than they have been much of the past year. The shorter the red bar, the fewer number of Big Money sell signals. 
Source: MAPsignals.com Instead, you can see the sharp falloff in the green bars – the Big Money buy signals. The BMI is falling because Big Money isn’t buying as much, not because the pros are dumping stocks left and right. I’d be much more cautious if the BMI were plummeting on a huge spike in selling.
This indicates more pause than panic and is a good sign for the end-of-year rally I still expect. It’s also consistent with what we can expect with the election now just a little over a week away. Big Money typically lightens up when the outcome remains uncertain, and that seems to be the case this year. I would not be surprised to see more softness and a weakening BMI heading into the election. Despite the big change in Big Money activity over the last week, what they’re buying hasn’t changed much at all. Here’s the latest Quantum Edge Hotlist: 
We’re still seeing Big Money favorites like Apollo Global Management Inc. (APO), Arista Networks Inc. (ANET), Check Point Software Technologies Ltd. (CHKP), and Tradeweb Markets Inc. (TW) top the list… along with new entrant Palo Alto Networks Inc. (PANW) and Ares Management Corp. (ARES). The bottom, as has been a theme lately, holds three biopharma companies, along with frequent bottom-lister Green Plains Inc. (GPRE) and former solar darling SolarEdge Technologies Inc. (SEDG). As we showed you last week, the Quantum Edge Hotlist is essential viewing as you start your week. There’s no better resource we know of to help you find high-quality growth stocks that Big Money is rushing into. We expect a big shake-up in this week’s list after the recent price action, and it should be interesting to see where Big Money targeted during last week’s sell-off. For access, you can go here to learn the details about a Quantum Edge Pro subscription. It’s now no longer a question of whether the Federal Reserve will cut interest rates… After the jobs data out Friday morning, bets that the Fed will pause at its next meeting this Wednesday completely evaporated. There’s now a consensus that the Fed will ease, with 99.8% of market participants thinking we’ll see a 25-point cut: 
We showed you last week that the Fed’s third mandate makes this likely even if it’s not the best move to continue fighting inflation. But the jobs data gave it all the justification it needed. As has become tradition, the blowout September jobs report was revised lower from 254,000 to 223,000. And in October, the U.S. economy added only 12,000 nonfarm positions. Excluding government jobs, private payrolls actually fell by -28,000, making it the first decline in private jobs since December of 2020. It took a long time for the Fed’s rate hikes to take effect on the job market, and the impact has thus far been mild. But we’re finally seeing labor cool down in consistent fashion. The issue is the fact that inflation has, in fact, not continued to cool down. If inflation remains sticky at the current levels, as we think it could, that means the Fed will ultimately have to accept a higher inflation rate and risk reigniting it. For decades, the Fed’s “rock” was employment, and its “hard place” was inflation. That balance was easy enough to manage in the low-inflation and low-unemployment era. But as we’ve been covering here in TradeSmith Daily, the Fed now has to add a third mandate, and thus a third difficult thing to manage – that being the federal debt interest expense… We might liken that to a sledgehammer given how much high-agency pressure, spoken or unspoken, there is on this front. We’re confident we’ll see a cut this week of 25 basis points, adding onto what’s likely to be plenty of other market chaos in the wake of the presidential election. And as we all attempt to navigate this election chaos, don’t miss what Charles Sizemore provides over at The Freeport Society… Investors should “go into next week expecting two months (minimum) of chaotic mess,” Charles writes. “You don’t have to wholesale dump everything. I’m certainly not doing that myself. But I recommend you free up at least a little cash to take advantage of any panic selling.” That way, you can get into the type of chaos trades Freeport recommends in its latest webinar, hopefully offsetting any volatility in your portfolio. Go here to watch that free webinar, including a specific stock pick Charles shares that looks like a great buy postelection. To your health and wealth,  Michael Salvatore
Editor, TradeSmith Daily P.S. If you’d like a further look behind the scenes at Freeport, make sure you catch up with my Research Review published this past Saturday. There we looked behind the paywall of Charles’ elite investment advisory, Freeport Alpha, and revealed one of his recent recommendations. | 
