The end of October often rewards stock investors with this profitable trade

The article discusses a historical end-of-October seasonal trade, contingent on a 3.2% S&P 500 decline, driven by institutional year-end rebalancing, though this condition has not yet been met for the current year. Despite sell signals from McMillan Volatility Bands and equity put-call ratios, the S&P 500 chart is deemed bullish above 6,500 support, and Cumulative Volume Breadth remains strong. Volatility (VIX) experienced a sharp but brief spike, subsequently generating two new buy signals and restoring a bullish VIX futures term structure, indicating market resilience. The author concludes that most indicators remain bullish, provided the S&P 500 holds above the 6,500 level.

Analysis

The S&P 500 (SPX) maintains a bullish chart outlook, having successfully defended the 6,500-6,550 support level five times since mid-September; a close below 6,500 would invalidate this. Despite sell signals from McMillan volatility bands and rising equity put-call ratios, these have not seen sustained follow-through. Market breadth, particularly Cumulative Volume Breadth (CVB), shows strength, achieving new all-time highs on October 15 and 16, counteracting some negative divergences.

Volatility (VIX) experienced a sharp but short-lived spike to nearly 29 on October 17, subsequently generating two new buy signals: a "spike peak" and a "trend of VIX" signal as it declined. The VIX futures term structure, which briefly inverted, has also normalized to a bullish upward slope, reflecting a rapid market recovery from the volatility event. This suggests underlying market resilience.

A historically profitable end-of-October seasonal trade, contingent on a 3.2% SPX decline, has not been triggered this year due to insufficient pullback. However, a contingent options strategy is proposed if SPX closes at 6,519 or lower by October 27, involving a bull call spread on SPY to capitalize on potential late-month buying. The overall market sentiment remains mildly positive, provided SPX holds above 6,500.

Key Decisions for Investors

• Monitor the S&P 500's 6,500 support level closely, as a breach would shift the bullish outlook to bearish.
• Consider the contingent options strategy involving SPY call spreads if the S&P 500 meets the 6,519 or lower closing condition by October 27, leveraging potential institutional year-end buying.
• Maintain existing bullish positions, particularly those with strong underlying technicals or positive put-call ratio signals, while acknowledging the potential for quick market reversals indicated by recent volatility.