To The Moon

As we head deeper into October, the financial markets are at a crossroads. Small-cap stocks, represented by the Russell 2000, recently surged to levels not seen since late 2021. In parallel, niche sectors such as nuclear power and rocket technology stocks have gained over 20%, reflecting heightened interest in thematic investments. This market environment raises the question: Are we likely to experience a pullback in October, or is the real volatility waiting until after the November election? Let's explore the landscape through both fundamental and technical lenses to form a recommendation.

Current Market Trends and Indicators

The Russell 2000's rally indicates renewed investor appetite for small-cap stocks, which tend to perform well in economically sensitive environments. The index gained momentum due to expectations of rate cuts and a bounce in regional banks. However, it's essential to note that large-cap indices like the S&P 500 and Nasdaq 100 have lagged, with technology stocks showing signs of exhaustion following weak earnings reports from companies like ASML. This divergence could be a signal that the bull market is maturing, suggesting limited upside for large caps going forward.

October Pullback or Post-Election Slide?

Historically, October has been a volatile month, often referred to as a “bear trap” where markets dip temporarily before recovering. Some analysts interpret the surge in meme stocks and small-cap equities as late-cycle behavior, which is often followed by a correction. This supports the theory that an October dip could materialize, especially as investors begin to lock in profits from recent gains.

On the other hand, the upcoming U.S. presidential election adds a layer of uncertainty. According to market insights, small-cap stocks tend to rally around election periods, especially when uncertainty is high. Some strategists, such as those from Cantor Fitzgerald, argue that a post-election rally in small caps is likely, regardless of the winner, as the resolution of political uncertainty tends to boost investor confidence. Additionally, a potential shift in policies under a new administration could significantly impact domestic industries, particularly those favoring small businesses.

Market Sentiment and Technical Analysis

From a technical perspective, the Russell 2000 has broken key resistance levels, signaling bullish sentiment. However, large-cap indices are showing divergence, with sectors like technology stalling. If the Russell 2000 retraces from its current highs, it could be a leading indicator of a broader market correction. Meanwhile, volatility remains a wildcard—election-year markets are often prone to swings as investors reposition portfolios based on shifting polls and expectations.

Sentiment indicators such as the VIX (Volatility Index) remain relatively subdued, suggesting that markets are not pricing in a significant correction just yet. However, sentiment could quickly deteriorate if macroeconomic data or geopolitical developments worsen in the coming weeks.

Conclusion

Given the market dynamics, I would take a cautious stance for October, favoring value-oriented defensive positions (such as $Schwab US Dividend Equity ETF(SCHD)$ and $Pfizer(PFE)$) to weather potential volatility. For a 10% of my portfolio, I will be more aggressive maintaining exposure to small-cap stocks ($iShares Russell 2000 ETF(IWM)$) through the election which could yield gains, as these stocks historically perform well during election cycles. As part of my risk management strategies, I will be setting stop-loss orders to mitigate downside risks.

If a dip occurs in October, it could present buying opportunities for myself as a long-term investor. However, staying agile and monitoring key events like Federal Reserve meetings, earnings reports, and election updates will be critical to navigating the coming months effectively.

Please DYODD.