Does October Bring Further Tricks?

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key takeaways

  • October has a turbulent history
  • The economic picture remains uncertain
  • VIX Implicit Choppy Trading

In the first week of October, unmistakable signs of fall are abundant. The morning has turned dark now. There is a coolness in the air. If you live in Chicago, the hope of winning a football beer season is enough to set you up for disappointment later. And if you’re an investor, the fear of what October might bring is front and center with the arrival of the market in what can only be described as weak legs.

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For September, the S&P 500 lost about 10%, while the Nasdaq lost 11%. At the same time, we ended the month with VIX trading near our high end for the year. In short, it makes for an uncomfortable start to a historically volatile month with more questions about where we are headed than answers.

The macro-economic picture remains hazy. Inflation is ravaging world economies as a strong dollar continues to wreak havoc on foreign currencies. The euro is dominant in the month below parity with the dollar. In the UK, the pound suffered a dramatic hit, prompting the new government to take tax cuts and the Bank of England to resort to temporary quantitative easing measures. Economies around the world seem to be facing turmoil and no one is quite sure where and how we will land. And if there’s one thing the market doesn’t appreciate, it’s uncertainty.

At the end of the week, oil is up more than 4% with OPEC+ considering a production cut. This comes at a time when oil prices, well below their year-high water mark, are still at historically high levels. Any cut in production and subsequent increase in prices is likely to fuel inflation further. Meanwhile, other commodities such as wheat, corn and soybeans are falling from their recent summer lows, which, if combined with higher oil prices, could pinch us consumers during the holiday season.

It will be a heavy week for economic data with the headline act coming out in Friday’s employment report. 250K new jobs created in September and unemployment rate expected to remain stable at 3.7%. I struggle to see how anything positive will come with the report. A strong report may raise inflationary fears while a weak report may be taken as a bearish signal. Then again, the markets have a way of surprising us when we least expect it.

For investors, this could be a choppy downtrend. The VIX is currently hovering just below 32, which will set the market price in a 2% daily move. In addition to the employment report, economic data is being released throughout the week and Fed members are also speaking out. So, I wouldn’t be surprised to see large fluctuations, making it even more important to stick to your investment gameplan and time horizon. With valuations cut across the board, long-term investors should be able to find plenty of opportunities while options traders can take advantage of higher volatility and rich premiums.

For educational purposes only, TastyTrade, Inc. Commentary.

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