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Posted on 4 October 2011 | 3,528 views

October 2011 S&P 500 Edges Towards Bear Market Territory

If we get through the dreaded month of October 2011 without a Black Monday or Black Friday market crash, then we’ll have plenty to be thankful for come November 2011.

According to one market watcher, the odds are that October 2011 will not be great even though the 4th quarter might be. You could say this might be a tale of two time frames, where we do get a bit more washout in the month of October, but then our traditional year end rally in November and December, only to be back in the soup again once we are back in January and the New Year as this bear market finally plays itself out.

As it stands now, the S&P 500 is about 17% down from its late April high and has avoided what the Russell 2000, Emerging Markets, Dow Jones Transportation and Nymex crude oil have not, and that is slipping into a bear market — a 20% decline from their recent highs.

The index of large cap U.S. stocks on the S&P 500 (Stock Symbol: SPX) closed Monday’s session down 32.19 points, or 2.9%, to 1,099.23, its lowest close since September 2010.

Monday’s closing level falls below a 1,120 to 1,220 range that analysts have been closely watching over the last several weeks. Professional money managers have tended to shrug off volatile intraday moves within that range, but Monday’s finish sent a red flag that the market has not yet bottomed out.

The market has been engendering a false sense of security that the lows had been in. If you got a weekly close below 1,120, that would strongly suggest there’s further to go on the downside.

Since 1945, 80% of the time that the S&P fell by 15% or more, it continued its slump to become a new bear market. In fact, it takes an average of 9 months for the market to go from peak to bear, at which point it continues falling for another 5 months to post an average decline of 33%. Bottom line, if history were to repeat itself, the S&P 500 would hit 915 sometime next year, around June 2012.

Until then, we could be on the cusp of a brief window of year-end opportunity. That’s because an awful third-quarter historically precedes a positive fourth-quarter. Out of 66 third-quarters since 1945, there have been 10 that declined 10% or more, including this year’s. Of the previous 9 third-quarter wipe outs, the S&P 500 turned positive in Q4 8 out of 9 times by an average of 7.2%. That’s an .888 batting average that we get a 4th quarter pop of some degree, or a mini-bull within a broader bear.

As far as hiding spots, you can forget about stocks. All assets classes, except Treasuries, decline in a bear market although Consumer Staples, Health Care, Utilities an Energy have outperformed the benchmark 82% of the time.

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