Seasonally Speaking, Next Three Weeks are Typically The Weakest of the Year

The Markets
Markets traded marginally higher on Wednesday, driven primarily by Consumer Discretionary stocks following a much better than expected report on Existing Home Sales. Homebuilders such as Pulte, Lennar, and Toll Brother pushed strongly higher, attacking multi-year highs that have been established over the past few trading sessions. Increasingly the housing industry is showing signs of recovering with Existing Sales hitting the highest level since early 2010 and back to levels witnessed prior to the 2008/2009 recession. Housing starts are also holding around the highest levels since the recession began. Seasonal tendencies for the home building industry, however, are less than favorable over the next month or so as the summer selling season concludes. Following the month-long “swoon”, the stocks see their best seasonal gains during the fourth quarter of the year as investors begin anticipating the spring building season.

Over the past couple of days markets have seen momentum starting to show signs of decline. Price is stagnating. Seasonally, equity markets are within the weakest three week period of the year, which concludes just past the first week of October. Weakness has also been known to persist throughout October, resulting in an intermediate-term bottom that is often realized just prior to the end of the month. Given this seasonal framework and technicals for a number of asset classes starting to see momentum rolling over, probability is high that a selloff/correction will occur in the weeks ahead, potentially related to earnings caution. FedEx has been a recent prominent company touting weak economic fundamentals and earnings caution. Another transportation stock confirmed what FedEx was saying on Wednesday after the closing bell. Railroad operator Norfolk Southern warned that earnings would trail analyst estimates due to weakness in coal and merchandise shipments. An unrelated company, Adobe, also issued an earnings forecast on Wednesday that also missed analyst estimates. Oracle, a industry titan, will report earnings on Thursday after the market close, a report that is typically a leading indictor of the strength within the technology sector going into the seasonally favouable fourth quarter.  (more)