October has a well-deserved reputation of being a volatile month for the market. Historically, it is the second-worst performing month after September, and it has had its share of market meltdowns (1929, 1987). I don't foresee anything that dramatic this October after the long rally. However, I think it is going to be a challenging month for investors for a variety of reasons. Prudent investors should raise cash if they don't already have a good reserve. Aggressive investors should add to their short positions. Patient and opportunistic investors should look forward to lower entry points.
10 reasons to be wary in October:
- Third quarter earnings season just kicked off. This is expected to the first quarter since 2009 where S&P earnings are down Y/Y. Alcoa (AA) was the first Dow component to report Tuesday morning. Even though it beat on the bottom line, the shares are down some 4% today on the company's poor guidance on worldwide demand. Expect this to be a theme this quarter.
- Chevron (CVX) also just warned that its third quarter results will be substantially lower than second quarter results. This is going to put a chill on big oil stocks, which will be a big negative for overall S&P earnings and market sentiment.
- Insider selling in early October has accelerated significantly from where it was in early September.
- Optics in Europe are going to get worse during the month. A general strike is called in Greece for next Thursday to coincide with a meeting of EU leaders. Should be a fun video from CNBC during trading hours next week.
- Speaking of Europe, the IMF just substantially cut European growth prospects.
- The IMF also warns that banks may have to sell 4.5T euros worth of assets if the European Union cannot stem this fiscal crisis.
- Finally, nothing in Spain has been resolved. This is a huge overhang on the European and our market.
- The fiscal year end for many institutional fund manager ends October 31. Most are behind their benchmarks which has been major driver of the "buy the dips" mentality of the last few months (The Dow has not had a 1% down day since June 25). This support will go away soon.
- Romney has taken the lead in the presidential polls. Although I believe a Romney victory would be a huge positive for job growth, the market is likely to rightly worry about the continuation of Helicopter Ben's QE efforts, which have been a major support for the market.
- Despite the onslaught of regulations over the past four years, little has been done to prevent the next financial crisis. The former inspector general of the TARP program recently stated that it is a matter of when, not if, the next financial debacle hits.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.