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History shows the market should be bottoming soon, and inflation data could be catalyst

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If the stock market is going to follow its historic pattern during a midterm election year, it would be bottoming just around now. There’s no one big consensus view, but some technical strategists see more turbulence for stocks even if there is a bounce near term. Some also see the potential for a fourth-quarter gain. Historically in mid-term years, stocks bottomed in October before ending the fourth quarter higher. “Typically, it’s after Oct. 9 that you start to see some better performance,” said Ari Wald, technical analyst at Oppenheimer. The analyst said that date was the average day the market bottomed in the last eight mid-term election years, going back to 1990. Wald said he’s watching for a possible catalyst this week, in the upcoming consumer price index report Thursday, and also the Federal Reserve’s next meeting in early November. “Our view is that the trading risk should continue to linger while the 10-year rate is above 3.5%. That is really what’s weighing on the market, most heavily throughout the year,” said Wald. The benchmark 10-year has been a key factor for the stock market this year. Growth stocks and tech react negatively when yields rise. Wald said both CPI and the Fed meeting could push the yield, which was at 3.88% Monday. If the CPI is not as hot as expected, yields could fall. Yields move opposite price. Wald said it was positive that the small cap Russell 2000 has held its lows. “The key positive is really is just how washed out the market has become,” said Wald. “It suggests the market is trying to bottom here…The setup is still there for the potential Q4 turn.” The analyst believes the big capitulation bottom came in June and the next bottom could be less dramatic. “These market bottoms unfold in two phases,” he said. “First you have the bang, then you have the whimper…Now what we are seeing is consistent with the whimper.” According to DataTrek Research, the S & P 500 is down 23.6% for the year, but nine single days were responsible for the entire decline. “Most occurred on/around CPI reports or Fed-related events. One was related to Russia-Ukraine, and just 2 were tied to disappointing corporate earnings. Traders may want to be cautious going into Thursday’s CPI report,” notes DataTrek. “Investors should moderate their expectations for US equity valuations; history shows these contract during periods of high volatility.” Economists expect the consumer price index to rise by 0.3% or 8.1% from last year, according to Dow Jones. That is less than the 8.3% year-over-year reported for August. “We need that trigger, a turn lower in interest rates,” said Wald. “Generally our view is that the rate market is trading more off Fed policy and the Fed’s commitment to fight inflation rather than the actual threat of inflation. I would expect CPI to continue to turn down as it has for three consecutive months, headline year over year. What’s going to drive a change in Fed policy is the key question here.” Katie Stockton, founder of Fairlead Securities, said Friday’s decline took the S & P 500 back to summertime lows. The technical indicators she is watching are sending mixed messages, with one of her indicators flashing a buy signal. “Because of the latter, there is still good possibility of a relief rally. Initial resistance is near 3,914.” But she expects any bounce would be a selling opportunity, given the bearish market cylce. That could mean a test of 3,500. Mark Newton, global technical strategist at Fundstrat, said he expects the market could be setting up to bounce in the next week or two. “Energy continues to work quite well, while Aerospace & Defense names are also holding up. Bottom line, the risk/reward is growing more positive in my view given that the downside risk looks very well defined at this past Monday 10/3 lows,” he wrote in a note. “Unless $SPX 3584 is taken out, it’s right to buy this dip, expecting a push up into/post next week’s CPI.”

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