There is no question that investors have good reason to fear the month of October. After all, three major stock market crashes have taken place in October: Black Thursday of October 24, 1929, Black Monday of October 19, 1987, and the crash of October 6, 2008 (which actually comprised of eight consecutive days of losses starting on October 1 and ending October 10).
On the other hand, if we are to examine the performance of some favorite technology stocks during the month of October for the past decade, investors could be surprised to learn that favorite technology stocks of Apple, Inc. (NASDAQ:AAPL), Hewlett-Packard Company (NYSE:HPQ), IBM (NYSE:IBM), Intel Corporation (NASDAQ:INTC), Microsoft Corporation (NASDAQ:MSFT) and Oracle Corporation (NYSE:ORCL) have actually appreciated by an average of 6.58% during the month of October for the years between 2002 and 2011.
|Number of Up-Years||9||6||8||7||7||9|
|Number of Down-Years||1||4||2||3||3||1|
Numbers compiled from data provided by Yahoo Finance
Apple has been the best October performing stock when compared to the other five technology companies. During the past decade, it has appreciated by an average of 10.16%, with nine up-years and only one down-year in 2008. In addition, Apple's drop of -5.34% in October 2008 was less than the drop experienced in the shares of the other five examined technology companies.
Although Apple shares have experienced a pullback recently, such pullback could prove temporary. In an article we published on September 24, 2012, "Can the dollar boost Apple shares?", we discussed how the recent depreciation in the dollar during the past eight weeks will bode well for Apple's U.S. dollar denominated international sales.
Furthermore, in another article published on September 18, 2012, "Apple: $700 done. $800 when?", we examined Apple's valuation which still looked attractive, baring a deterioration in the macro environment, or a substantial disappointment in iPhone 5 sales. Although there have been recent jitters concerning Apple's iPhone 5 sales, such issues have been the result of temporary supply chain limitations, as opposed to structural demand weakness. Investors who agree with our outlook can maintain the strategy proposed on September 18, comprising of being long Apple shares along with a long position in the $680 puts, or alternatively, can take advantage of the current pullback by selling the $680 puts at about $43.50, and maintaining a naked long Apple stock position.
During the past decade, IBM has appreciated by an average of 4.76%, during October, with eight up-years and only two down-years in 2007 and 2008. However, it is certainly noticeable that IBM's drop of -20.51% in October 2008 is quite substantial. This is primarily due to IBM's sensitivity to the overall health of the economy, hence suffering when the perception for the overall economy deteriorated due to the mortgage debacle.
Although IBM has recorded eight up-years in the past decade, given its sensitivity to the overall economy, it is probably prudent to hedge any long October position with out-of-the-money puts (such as November 200 puts for a premium of about $2.20) in case of any unexpected negative macro development. Meanwhile, IBM stands to benefit from the long term nature of its clients' contracts, in addition to substantial international sales which will benefit from a depreciating dollar, as well as potential added value from serving the cloud environment.
During the past decade, Oracle has appreciated by an average of 7.24%, during October, with nine up-years and only one down-year in 2008. Such a record is only second to Apple's performance. Furthermore, Oracle's decline in October 2008 was also somewhat muted at -9.93% when compared to IBM, Intel, Microsoft and Hewlett Packard.
The latest earnings release by Oracle was somewhat disappointing due to a miss on its top line, with revenues coming in at $8.21 billion vs. analysts' estimates of $8.42 billion. Oracle shares have actually pulled back from their recent high of $33.10 on September 17 to as low as $30.73 on September 26, while currently trading around $31.70 as of October 1, 2012. This may prove to be a good entry point, where Oracle shares may also get a boost from Ellison's pledge to generate additional revenues from the cloud. Once again, given the current cheap volatility environment, it may be prudent to hedge a long position in Oracle shares with out-of-the-money November $30 puts for a premium of about $0.40.
Hewlett-Packard Company, Intel Corporation and Microsoft Corporation
Although shares of Hewlett Packard, Intel and Microsoft have also performed favorably on average during the month of October for the past decade, rising an average of 5.7%, 6.11% and 5.5% respectively, their fortunes for the upcoming months are somewhat intertwined and dependent on the success of Windows 8.
Microsoft's future is also dependent on the success of its mobile operating system, Windows Phone 8, and the related success of Windows based phones, such as the Nokia Lumia 920, vis-a-vis Apple's iPhone 5. Nevertheless, Microsoft shares have actually appreciated in October during 7 of the past 10 years, and given its new operating system releases, there is a good likelihood such a trend could continue this October.
Intel shares have also appreciated in October during 7 of the past 10 years. Current issues relating to Intel's Ultrabooks could possibly act as a headwind to Intel's shares this October. However, Intel's future is also intertwined with the success of Windows 8, and it is very possible that potential for success for Microsoft's new operating system could give fuel to Intel's shares this October.
In the case of Hewlett Packard, it actually had as many as 4 down Octobers during the past decade, and its favorable average performance had benefited from its stellar performance in October 2002 where its shares appreciated by as much as 35.33%. Some would argue that HPQ is no longer a favorite technology stock, however, as it had been in such a league in the past, and depending whether it is able to turn its fortunes in the future, it may still come back in favor. Hewlett Packard is a large ship, and sometimes it takes time to steer such a large ship back onto the right course.
Nevertheless, we do believe that downside risk for these three stocks is potentially higher than for Apple, IBM and Oracle, while a successful Windows 8 could also boost their upside. Hence, given current low implied volatility levels, investors may be better served by buying slightly out-of-the-money calls and puts, with slightly higher weighting on the calls in order to potentially benefit from a favorable October.
In conclusion, although investors should fear October due to its history for producing market crashes, favorite technology shares have also actually appreciated on average during the month of October for the past decade. Hence, investors can possibly benefit from maintaining long positions in Apple, IBM and Oracle, while hedging any unexpected downside risk with out-of-the-money puts. Meanwhile, although the odds are also in favor of Microsoft, Hewlett Packard and Intel, and due to uncertainty surrounding the level of success of Microsoft 8, it may be prudent to express bullish sentiment through the purchase of straddles, with a slight bias towards calls.