By Simon Maierhofer
October is the most bipolar month of the year. No other month has launched and killed as many bull markets (i.e. 2007). The only index to actually reach a bull market high in October was the Nasdaq. Will this October kill this bull market? Will it kill the Nasdaq?
A couple of weeks ago, the Profit Radar Report pointed out bearish divergences (see chart below) and warned that the Nasdaq was cruising for an October bruising.
This divergence became acute on Monday, when the Nasdaq PowerShares QQQ Trust Series 1 ETF /zigman2/quotes/208575548/composite QQQ -0.32% matched its previous all-time closing high, but relative strength (RSI) carved out yet another bearish divergence (see chart insert).
Getting killed or bruised?
The Nasdaq succumbed to the bearish divergences caused by internal weakness (and most other indexes followed), but does this mean the bull market is over?
The chart below plots the S&P 500 against the Profit Radar Report's favorite liquidity indicator. This indicator correctly foreshadowed the 1987, 2000 and 2007 bear markets (go here for more details about this liquidity indicator ).
The liquidity indicator reached a new high on Sept. 22, although the S&P 500 didn't. This is considered a bullish divergence.
The last time this happened was in late June right after the Brexit-vote low (S&P 1992), when the Profit Radar Report stated that: " Liquidity is already at new highs, which strongly suggests that the S&P will follow in the not so distant future ."
The chart also shows a warning signal registered in May 2015 (dashed red line). Although this warning signal was followed by two serious corrections, the bearish divergence was much shorter than the divergences seen in 1987, 2000 and 2007.
In addition, investor sentiment at the May 2015 all-time high was not indicative of a major market top. However, investor sentiment reached a bearish extreme (bullish for stocks) in February 2016, when the Profit Radar Report recommended buying (on Feb. 11 at S&P 1828).
Based on the liquidity indicator, October won't kill this bear market (and based on the indicator's track record, we shouldn't bet against it). October may, however, continue to bruise stocks. How low can stocks go? This S&P 500 and Nasdaq analysis provides early clues and potential down side targets.