History May Favor Bulls This Quarter, Despite Volatility

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Stocks are coming off their worst week since March, but history may favor the bulls.

After all, we’re in the fourth quarter — a time of the year with a strong bias to the upside. Consider some of these points we crunched from TradeStation’s wealth of chart data:

  • The S&P 500 has averaged a 3.8 percent gain in the October-December periods each year since the start of 1968. That’s almost twice the performance of the other three quarters.
  • The median return over the time frame is even higher, up 5 percent. That’s more than twice the figure for the other three quarters.
  • There have been 38 positive fourth quarters since 1968 and only 12 negatives. That winning ratio of almost 2:1 compares with ratios of about 3:2 for the first, second and third quarters over all those years.

Obviously, past performance is not a guarantee of future results, and no two periods of time in the market are identical. But it’s worth recognizing some of these longer-term seasonal patterns.

This year, there are some potential twists. The first is the hawkish Federal Reserve. Usually interest-rate hikes make investors nervous, but they also tend to occur during periods of strong economic growth. That’s the case right now.

Another oddity about this year is the strength of the third quarter. Often the market languishes over the summer months and then rallies into the year-end. Just look at 2004, 2011 and 2015. But this year the S&P 500 just had its best third quarter since 2010, up more than 7 percent.

Without the fuel for a rebound rally, there may be less potential for buyers to come off the sidelines. In other words, the bulls may already have robbed Peter to pay Paul.

Another potential risk is the recent shift away from technology and growth stocks in the Nasdaq, especially e-commerce stocks and semiconductors. Some, like Facebook (FB) and Netflix (NFLX), have shown slowing growth. Alphabet (GOOGL) faces  potential competition from Amazon.com (AMZN) in its core advertising business and the potential for antitrust regulation.

Others are simply showing signs of investors liquidating long-term winners, especially because their high multiples can be less attractive when interest rates increase.

In conclusion, there are both positives and negatives facing the market as we enter the thick of earnings season in the fourth quarter of 2018.

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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.