Is October the Month that Markets Crash?

One thing that’s always attracted me to the stock market is that it has a long and storied history. In fact, I vividly remember, when I first began working for Cabot back in 1999, eating lunch at our firm’s picnic table every day and re-reading 30 years of Cabot Market Letters, which we have archived in the office.

Of course, as a history buff, my first move was to go back and look up all the dates of major, jaw-dropping events – the 1973-1974 bear market, the 1982 blast-off, the 1987 crash, the 1990 bear market and others. Reading the letters from these years was like taking part in an adventure … without any financial risk, of course!

One of the most discussed themes in market history has to do with October–specifically, that October is a month that the market crashes. And, unlike a simple myth, there’s a lot of truth to the “October crash” crowd. The 1929 and 1987 implosions remain forefront in investors’ minds, but there have also been numerous other October wipeouts, including the 550-point Dow drop in 1997, the 1998 Russian Ruble/Long-Term Capital Management debacle, and, of course, last year’s acceleration of financial panic from late September.

But as we know, the market is a contrary animal, and it’s succeeding in that respect once again. As it turns out, October’s history is nearly the exact opposite of what most investors believe!

Since 1958, October is actually the sixth-best month, right in the middle of the pack, with a 0.9% average gain for the S&P 500. (For the record, September and February are the two worst months of the year, on average.) Sixty percent of all Octobers have finished on the positive side of the ledger.

Moreover, instead of a month that ushers in crashes, October is actually a month that ends them. According to Stock Trader’s Almanac 2009, October has marked the end of the 1946, 1957, 1960, 1962, 1966, 1974, 1987 (the decline actually started in August of ‘87), 1990, 1998 and 2002 bear markets. In my opinion, it also marked the end of last year’s collapse, as the broad market bottomed in October (when 88% of the NYSE hit new 52-week lows).

Also, looking ahead, the months of November, December and January are three of the four best months of the year (April is the other). Thus, far more often than not, October is a month to buy, not sell!

With that all said, I’m not a huge believer in predicting what will happen this year–maybe the market is topping out here and is set for a big slide, or maybe the market will keep trending higher throughout October. My preference is to let the market decide and to interpret its decision with our indicators.

Right now, the intermediate- and longer-term trends are pointing up, and the broad market remains exceptionally healthy, so the odds favor higher prices ahead. But the point is that, despite all the spooky legends, October is far more likely to offer treats than tricks.

Comments

[Mad Hedge Fund Trader]

wed For the last six months there has been a great big whopping contradiction in the markets. The stock market has been discounting a return to the “Roaring Twenties,” while the bond market has been anticipating another “Great Depression.” After yesterday’s publication of the Labor Department’s September nonfarm payroll number showing the loss of another 263,000 jobs, it looks like the bond market now has the upper hand. This takes the unemployment rate up 0.1% to 9.8%, and total job losses for this recession to 7 million. The really disturbing aspect of this number is that 57,000 teachers were fired, as states chop budgets to the bone. This is really eating our seed corn by the bushel full. Of course, I have been banging pots and pans, setting off distress flares, and yanking the fire alarm, trying to alert readers that this kind of disappointment was coming (click here for “Risk Reversals Can Be Such a Bitch” and here for “Stocks Offer No Value”). Shares have dropped 5% from last week’s peak, as the bond market soared, the ten year yield reaching nosebleed territory of 3.05%. The dollar maintained its flight to safety status, which to me is one of the great ironies of all time. It’s like that reprobate, alcoholic uncle with the bad teeth, who, when your car breaks down in the middle of a downpour in a bad neighborhood, will always let you crash on his sofa. Let’s call him your Uncle Sam. You have to hand it to PIMCO’s inveterate card counter, Bill Gross, who says this is all about transitioning to a “new” normal of 1%-2% real GDP growth. That’s why he was loading the boat with bond yields at 4%, a “ballsey” move at the time, which now smells like roses. I guess that’s why they call him the “Bond King.”

2009 Oct 04 09:57 AM

[PastTense]

Mad Hedge.. is wrong about the 7 million job loss figure; 8 million is closer:
"Instead of 7.2 million net jobs lost since December 2007, the preliminary benchmark estimate suggests the U.S. has lost over 8.0 million net jobs during that period."
www.calculatedriskblog.../

2009 Oct 04 11:25 AM

[H. T. Love]

Yes. A recent article this weekend says that a revision of 842,000 additional losses are to be reported for the 4th qtr/'8 and 1st qtr '09, *if* I recall correctly.

I guess that would qualify as a "minor" revision, no? If true, how could they just overlook 140.3K jobs a month for 9 months?

Me thinks that the rumors of BLS intentional manipulation might have more weight than previously.

HardToLove


On Oct 04 11:25 AM PastTense wrote:

> Mad Hedge.. is wrong about the 7 million job loss figure; 8 million
> is closer:
> "Instead of 7.2 million net jobs lost since December 2007, the preliminary
> benchmark estimate suggests the U.S. has lost over 8.0 million net
> jobs during that period."
> www.calculatedriskblog.../

2009 Oct 04 11:41 AM

[Old Trader]

"Since 1958, October is actually the sixth-best month, right in the middle of the pack, with a 0.9% average gain for the S&P 500."

So basically, according to this, predicting how the market will do this month is essentially a coin toss. The flip side of Nov., Dec., Jan. as being the best months, along with April is the "sell in May and go away" chestnut, which hasn't been working all that well, recently.

2009 Oct 04 01:02 PM

[The Geoffster]

Tea leaves.

2009 Oct 04 01:56 PM

[H. T. Love]

Smoked or "drunk"?

HardToLove


On Oct 04 01:56 PM The Geoffster wrote:

> Tea leaves.

2009 Oct 04 03:24 PM

[Dialectical Materialist]

"Right now, the intermediate- and longer-term trends are pointing up, and the broad market remains exceptionally healthy,"

Which broad market would that be? Exceptionally healthy? That's a step or two above just plain ole "healthy" which I think is enough of a stretch. The reason I think the market will drop this October has nothing to do with it being October and everything to do with the market not actually being healthy. Time will tell...

2009 Oct 04 04:10 PM

[H. T. Love]

CORRECTION! It was 800K! See this comment from Roger Knights linking to the NYT article.

seekingalpha.com/artic...

HardToLove

On Oct 04 11:41 AM H. T. Love wrote:

> Yes. A recent article this weekend says that a revision of 842,000
> additional losses are to be reported for the 4th qtr/'8 and 1st qtr
> '09, *if* I recall correctly.
>
> I guess that would qualify as a "minor" revision, no? If true, how
> could they just overlook 140.3K jobs a month for 9 months?
>
> Me thinks that the rumors of BLS intentional manipulation might have
> more weight than previously.
>
> HardToLove

2009 Oct 04 04:32 PM

[untrusting investor]

A totally useless article in our view. In order to make any money in the markets, you have to buy at some point and sell at some point. We see nothing is this article providing any guidance whatsoever about that. At least Doug Kass has the courage of his convictions, and backs it up with solid reasoning, to recommend buy and sell points. The same could be said for John Hussman regarding buying, selling. hedging. Either of these commentators provide significantly more "actionable advice" and thus are far more credible in our view. Note, for those interested, John Hussman did have fairly significant postions in commodities and gold, but recently sold some of these and locked in profits as he apparently believes the markets are topping even though he has significant hedges in place as well.

2009 Oct 04 05:33 PM

[Tomcat101]

No crash this year. We'll be lucky if we even get a decent 10% pullback.

2009 Oct 04 05:35 PM

[Mrudula Shah]

I agree with the author. Forget about the October-fear. It's been so because the quarterly results come out in October, shares of those companies that do worse than the 2nd quarter are sold off and vice versa for those that do better. For example, this year, the banks and financial companies are generally going the post better results and the retailers would be worse off due to continued unemployment and people restricted in their shopping. During personnel cuts, companies also have to incur severance costs, which will affect the result for such companies for the 3rd quarter. Overall however - a mixed result. For fund managers who invest in several baskets of securities, depending on their portfolio mix, results could be affetcted by the groups' performance. For a wise individual investor with a portfolio of a small number of carefully picked companies, the consideration of this so-called October effect is not of significant importance (except some effect, if any, of the overall market direction) and guidance from such relationships should be ignored.

2009 Oct 04 06:30 PM