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The October Rally

Nick Kalivas

Its earnings season again.  Traditionally, traders have viewed the earnings report from Alcoa (AA) as the start of the earnings season.  Alcoa recently lost its position in the Dow Jones Industrial Average, but it is still a well followed industrial name, and will provide a view on global economic conditions.  This year, Alcoa releases its Q3 profits after the close on Tuesday, October 8th.

The government “shutdown” and debt ceiling saga make the current market environment a bit unusual, and could distract the market from the flow of earnings.  However, in the end stocks trade on earnings and the circus in Washington is likely to be short lived.

Many traders embrace seasonal patterns and it is always interesting to see how the market has traded in certain time periods.  For this reason, it may be worth examining how the S&P 500 trades based on the S&P 500 ETF (SPY) during the Q3 earnings season. It could help with a view on market timing – exiting and entering positions.

Earnings expectations:

At this juncture, the S&P website has expected Q3 2013 operating earnings per share for the S&P 500 at $26.84 on a bottom up basis.  This compares to a preliminary $26.36 in Q2 and $24.00 a year ago.  Profits are expected to rise 1.8% sequentially and 11.8% y/y. 

Even though profit growth is expected to be strong, Q3 2013 EPS estimates for the S&P 500 have been falling through the year.  At the start of the year, the trade was looking for $28.64.  Profit expectations have fallen $1.80 since.

Looking ahead, Q4 2013 operating earnings per share are projected at $28.88, which would equate to a gain of 7.6% sequentially and 24.7% y/y.   The expectations seem extremely high.  The recent strength in the ISM surveys holds out support for profit strength, but the events in Washington are a headwind.

Like the estimate for Q3 2013, the earnings per share estimate for Q4 2013 has also been falling.  At the start of the year, the trade was looking for $29.75. Profit expectations have declined $0.87.

Last quarter:

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The graphic above displays pattern of the S&P 500 ETF (SPY) just before and 20 trading days after the release of Alcoa’s earnings in July 2013.  The 5, 10, and 15 year averages and the 2013 pattern are provided.  The stock market traded strong during the Q2 earnings release season, and seemed to generally follow the average with the exception of strength between day 1 and day 5 and day 18 and day 20.    

This quarter:

The average price pattern for SPY looks very choppy during the Q3 period.  This may be a function of stock market volatility in the fall.  The stock market is well known for fall swoons – think of the October 1987 stock market crash, LTCM /Russian crisis, and the financial crisis of 2008. Politicians seem wiling to risk a swoon this year with their lack of cooperation. 

(click graphic to enlarge)

Reading between the lines, it looks like there is a relative low on the third day after the release of Alcoa’s earnings.  This day will correspond to October 11 in 2013 and price strength continues for about 20 days after the release which equates to November 5. This year's dates are placed on the x-axis. 

SPY has been up 12 of the past 15 years or 80% of the time from day 3 (3 days after Alcoa’s earnings release) to day 20 (20 days after Alcoa’s earnings release).  The average gain is 3.97%.  Broken out by up and down periods, the average gain in the 12 up periods has been 5.69%, while the average decline in the 3 down periods is 2.89%.   The graphic below displays the return by year.

(click graphic to enlarge)

The down years were 2012, 2009, and 2007.  The weakness has occurred recently compared to the 15 year time frame.  There were big run ups in 1998, 2008 and 2002.  These were periods where the market had sold off sharply going into earnings season, and they tend to skew the average.


The stock market has tended to trade with a firm tone during the Q3 earnings release season.  The performance in recent years has been less strong than in the past, but the track record of strength is eye catching.  An end of the circus in Washington could be a catalyst for a stock market rally, but the poisonous attitude in Washington makes the current year a bit unusual.  Let’s look to see if history repeats. 

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