When investing, stack the odds in your favor.
Oversold readings and seasonality tailwinds could mean it’s bullish season for stocks.
No one wants to see the positives in this market it seems. Many are sour on rising rates, Russian war, and an earnings contraction. It’s true, it’s easy to be worrisome.
But given all those potential headwinds, today is a reminder that stocks have entered a historically green time of year. The 4th quarter is known for rising prices and even better attitudes. Holidays tend to bring joy to folks.
Add to it that our BMI pierced oversold readings on Friday, and the playbook is set for liftoff. Any hint of positive news in the coming weeks could send markets vaulting higher.
Let’s dive in.
Bullish Season for Stocks
Now that September is behind us, it’s time to get constructive on stocks. September is known to be ugly, and 2022 didn’t disappoint with a gruesome -9.2% return for the S&P 500.
That’s the bad news.
The good news is stocks tend to find firmer footing in the 4th quarter, beginning in October. Below lists the monthly returns for the S&P 500 going back to 1990. Notice how October through December are very green months on average:
October averages a gain of 1.4%, followed by 1.8% for November and 1.5% in December. Not bad! And keep in mind those green shoots follow a seasonally negative time of year: August and September. Those months tend to fall .6% and .8% respectively.
But get this, in midterm election years, the 4th quarter gains are even more impressive. Below you’ll see what I mean. Going back to 1990, October and November soar 2.5% and 2.4% respectively:
No question, we are entering the bullish season for stocks. This knowledge alone should have bears on their toes, near-term.
But this isn’t all there is to be excited about. At MAPsignals, we follow Big Institutional money flows. Big, unusual volumes in stocks can tip us off to positioning.
Just last week we saw some of the most extreme oversold readings all year. By our count, investors were dumping stocks hand over fist. And our Big Money Index briefly dipped into oversold territory as of Friday’s close.
Since then, the pendulum has been swinging upwards:
I circled what’s important: Each of the 2 oversold readings earlier this year prefaced a big near-term rally. And since September 30th, this latest oversold trigger hit just before the S&P 500 ran up 5.5%. I wouldn’t be surprised if there’s more in the tank in the weeks to come.
This latest dip into oversold territory marks the 23rd instance since 1990. It’s incredibly rare…but also, a great time to buy stocks. Below you’ll see all instances and the forward S&P 500 returns post the first day in the green zone:
The average gain for stocks 12 months after reaching oversold is a stunning +15.3%. The 24-month average return sits at 29.8%. If you ask me, that’s worth getting excited about.
Considering we’re entering a seasonally strong midterm election year, the bullish season for stocks projection has even more credence.
Let’s wrap up.
Here’s the bottom line: As we enter the 4th quarter, history points to greener pastures for stocks. In midterm election years, October and November gain 2.5% and 2.4% respectively.
Add to it that we recently triggered an oversold Big Money Index, and we could be looking at more gains in the coming months. The last 2 oversold readings hit just before a near-term pop in the market.
Keep in mind, this isn’t an all-clear signal. However, the odds are certainly stacking up for improving sentiment and portfolio prices.
The bullish season for stocks is here.
***Finally, if you want a data-driven list of stocks we believe are poised for upside, check out our members only post released Monday, Oversold Stock Opportunities. In it we cover growth, dividend-growth, and recession opportunities.