Get ready for Wall Street's sideways crawl to end

On Monday, U.S. equities danced around the unchanged line to put a quiet end to the most unexciting October in 40 years, at least in terms of trading activity. Large-cap stocks remain within the confines of an extremely tight and narrowing two-month range marking three years of listlessness.

Stocks just aren’t going anywhere. And investor interest, based on sentiment and fund flow data, has been somewhere else. But that could change in the days to come with several major events looming, including Wednesday’s Federal Reserve policy decision, Friday’s payroll report for October and, of course the big one: Election Day next Tuesday.

Already, volatility and excitement have broken out in the oil and gas sector as energy prices were hammered by a “no deal” result out of the OPEC meeting in Vienna -- capping months of on-again/off-again hype for a possible supply freeze deal. This time, a deal featuring a cut in Saudi output was teased in September but broke down amid ongoing bullheadedness from the Iranians and Iraqis over their output levels.

Furthermore, there’s no evidence non-OPEC members such as Russia are interested in joining in.

Why would they? It’s a classic “prisoners’ dilemma”: Better to let the other guy cut output and keep yours the same. Further discussions were pushed back to late November, keeping the “hint-and-tease” act we’ve seen since February alive a little longer. It’s no surprise then that energy stocks led the way down with a 1.2 percent loss in trading on Monday, with Exxon Mobil (XOM) falling 1.7 percent back to late-September levels.

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Overall, October marked the third straight monthly loss (chart above) for stocks as the Dow ended down 0.9 percent, thanks to the lifting effect of gains in key stocks like Boeing (BA) and Goldman Sachs (GS). The other indexes weren’t as lucky: The Russell 2000 lost 4.8 percent as small caps tested down to lows not seen since July.

The good news is that the recent poor performance could open the door to a run higher, a prelude to the familiar “Santa Claus” rally. Assuming, of course, that stocks respond well to the electoral outcome next week and are prepared for a possible Fed rate hike before year-end.  

Jeff Hirsch of the Traders’ Almanac notes that since 1950 there have been 33 consecutive monthly losing streaks of three months or more. In 20 of these occurrences, the losing streak ended at three months. And within one month of ending a losing streaks of three months or longer, the S&P 500 was higher 100 percent of the time, for an average gain of 4.7 percent.

The worst-ever losing streak was 1974’s nine consecutive months, which was followed by the market’s largest-ever one-month gain, of 16.3 percent.

The renewed weakness in energy prices and energy stocks is a concern because of the drag on corporate earnings, amid a five-quarter-long decline in profitability. Adding to the worries are tepid GDP growth and a cautious U.S. consumer.

But in terms of market history alone, we could be on the cusp of a major rebound as the stalemate in stocks looks set to end one way or another.  

  • Anthony Mirhaydari

    Anthony Mirhaydari is founder of the Edge , an investment advisory newsletter, and Edge Pro, options newsletter. Previously, he was a markets columnist for MSN Money; a senior research analyst with Markman Capital Insight, a money management firm; and an analyst with Moss Adams focusing on the financial services industry.