Why We Could Test All-Time Highs in November

October treated investors to more than just bags full of candy, as the S&P 500 Index (SPX - 2,079.36) finished the month up more than 8%, making the August collapse and volatility of September seem like a bad dream. After a huge rally coming into last week, the market slowed its momentum just a bit in the final week of the month. The SPX was up just 0.5%, with most of its weekly gain occurring on Wednesday, after the Fed left rates alone and kept everybody cozy for the upcoming holiday season.

While many onlookers expected the Fed to keep rates unchanged, the policy statement is what really excited buyers on Wednesday. The main takeaway was that policy officials are increasingly getting on the same page, and most believe the global economic and financial environment is improving enough for a potential rate hike to be on the table for December's meeting. The odds for a rate hike in December jumped from about 33% before the Fed meeting, up to 50% immediately following. This makes economic reports between now and the next meeting even more important for Fed watchers.

Despite the big jump on Fed day, 150 companies within the SPX also reported earnings last week. Overall, the theme for earnings season continues to be one of companies beating on earnings, missing on revenues, and offering ho-hum forward guidance. While Fed officials continue to mull their rate hike, the European Central Bank and Bank of Japan have recently hinted they will consider providing more accommodation before the end of the year. Congress also came to agreement on a two-year budget deal and debt-limit increase through March 2017. Mark that down as one short-term concern off the list for now.

Taking a look at the charts, one can't help but be impressed by the market's resilience. If the momentum continues into November, many major markets will soon be contending with their former all-time highs as potential resistance. Regular readers of Monday Morning Outlook are aware of the comparisons Schaeffer's Senior VP of Research Todd Salamone has been making between this year's market and 2011's price action. In 2011, we also experienced a very strong month of October after a collapse in August and a volatile trading range in September. November 2011 experienced a nearly 10% pullback at the lows, and we saw choppy price action through the end of the year, before trending higher at the start of 2012. 

For those of you looking to reduce exposure or add hedges, the Russell 2000 Index (RUT - 1,161.86) may be the place for you. While the SPX is less than 2% below its all-time high, RUT is still struggling to take out resistance at the 1,165 area. This level is 10% below the 2015 closing high, a 38.2% Fibonacci retracement of the June high and late-September low, and also the site of resistance during the entire month of October. This small-cap portion of the market has continued to underperform recently.

Despite concerns with small-cap underperformance and eerie similarities to 2011, let's not forget about seasonality. As Schaeffer's Senior Quantitative Analyst Rocky White pointed out in his Indicator of the Week column recently, the November-through-April period has averaged a 6.56% gain, and is the best-performing six-month time period for the SPX during the past 50 years. Also of note, the six-month period we just finished -- May-October -- came in last place in his study, with an average return of 0.83%.  Taking a look at 2015, since May, the market is down nearly 1%, and we have followed suit with historical norms -- and bulls surely hope we continue to do so during the next several months.

So, November-April is historically strong, but how does November look when we have a big move up in October, like we did this year? Well, to put it simply, a good October leads to a good November. Taking a look at the data below, when October is up at least 4%, the following month significantly outperforms the typical November. A normal November averages a 1.16% return, going back 50 years, but when October is up more than 4%, November averages a gain of 1.89%. It's also positive more often, compared to a typical November. That is a good sign for the bulls.

Many of our sentiment indicators also tell us that investors and portfolio managers left the market for dead in late September. The gradual return of this sideline money surely helped fuel October's incredible rally. Checking in on a few of these indicators, we can see we still have a ways to go before we consider these bearish groups optimistic again. 

The National Association of Active Investment Managers (NAAIM) Exposure Index represents the average exposure to U.S. equity markets reported by member firms. This survey indicates exposure of 58.4%, which is higher than the 16.39% exposure reported just ahead of the recent rally. Taking a look at this indicator's 10-week moving average, we can see it's near its lowest level since October 2011, and just starting to turn higher. Comparing this to October 2011, we can see how a turn higher from an extremely low level was followed by very bullish price action.

While the S&P 500 is less than 2% from its all-time highs, we can see managers' exposure is much lower than it was when the market traded near its all-time high earlier this year. This reduced exposure leaves plenty of room for this figure to increase, which could lead to higher prices for the U.S. stock market.

The 10-day, equity-only, buy-to-open put/call volume ratio below also shows us how investors increased their bearish bets relative to bullish bets through the end of September. This ratio has started to roll over in the midst of the strong price action, but a further unwinding to the downside could bring more buying pressure to the table.

Several individual investor sentiment polls also reached pessimistic extremes at the beginning of October, as well. Many of these are still in the midst of climbing from their bearish extremes. Throw in the fact that we have been seeing significant amounts of demand for CBOE Volatility Index (VIX - 15.07) calls and VIX-related products, and it's clear that we have a market that is melting up in the face of a lot of doubters.

If the momentum continues into November, many major markets will soon be contending with their former all-time highs as potential resistance. This upcoming week will feature earnings reports from Walt Disney (NYSE:DIS), Sprint Corp (NYSE:S), Facebook Inc (NASDAQ:FB), Tesla Motors Inc (NASDAQ:TSLA), and Whole Foods Market, Inc. (NYSE:WFM), among many others. The October monthly jobs report will also come, certainly grabbing the attention of those aiming to predict whether we will get higher interest rates for Christmas.     

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