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October 03, 2005

A Look at October Market History

Despite September's history as the worst month of the year, September 2005 turned out pretty well. The S&P 500 produced a gain of 69 basis points and a total return of 84 basis points. The NASDAQ and the Russell 2000 did produce negative returns on a price only basis for September but both indices fell less than 10 basis points...

...In a Street Insight post about September market history, I wondered whether the fact that September was a bad month was too widely known and therefore a fade trade (go against the conventional wisdom) was in order. It turns out that it didn’t really matter one way or the other. As we begin October, I think the conventional wisdom is that Ocotber is a lousy month but history suggests otherwise as the following data from the Stock Trader's Almanac reveals:

• Over the last 33 years, the S&P has produced an average return of 1% to rank as 5th best month with 19 up years and 14 down years
• Over the past 33 years, the DJIA has produced an average return of 0.6% to rank as the 6thbest month with 20 up years and 13 down years
• Over the past 33 years, the NASDAQ has produced an average return of 0.5% to rank as the 8th best month with 17 up years and 16 down years

October also marks the end of the worst six months of the year. Stocks tend to put in their best performance from the beginning of November through the end of April. So October actually usually finishes off a bearish period and marks the launch of the seasonal rally. In fact, significant lows were made in 1987, 1990, 1998, and 2002 which launched major rallies. The seasonal trade is not surprising as Wall Street is normally an optimistic and bullish place. October puts the current year behind us from an earnings perspective and allows us to shift toward next year when we usually adopt a hopeful view.

Given the strong third quarter results for the market this year with the S&P producing a total return of 3.60%, it does not appear a major or seasonal low is at hand as we enter October. Most most managers and market strategists I know seem to have a cautious view as we begin the month. So maybe once again, conventional wisdom will prove wrong and October will be a positive month.

My own view is to look for a negative start for the month on the basis of earnings warnings with a decline toward recent lows (down 2-3%) setting up an excellent buying opportunity for a run to yearly highs to end the year. I have built cash up to my maximum levels at about 10-12% by taking partial profits in my winners. If my playbook is correct, I'll be looking to buy Japan (EWJ and JOF) and the NASDAQ where I can gain exposure to the historic seasonal trade that favors information technology in the fourth quarter.

Posted by Steve Birenberg at October 3, 2005 10:26 AM in Stock Market