October begins today with its reputation of major stock market crashes. 1929, 1987, 1989, 1997 and 2008 come to mind. Truth be told, however, October is really a bear killer more than anything else with some major bottoms forming during the month. 1989, 1990, 1997, 1998, 2002 and 2011. Usually, when stocks are under pressure and declining into October, the month acts as an accelerant to a bottom. When stocks are in an uptrend, the first week of the month is usually strong and the last three weeks are weak.
The stats look like this when stocks are in an uptrend like today.
First week – +0.68%
Second, third and fourth weeks each – -0.25%
Regarding election years, as I have done in the past, I like to only look at incumbent years when the sitting president is standing for reelection and has a vested interested in juicing the economy and markets.
In the modern era, there have been 9 incumbent election years, with only two October losses, 2012 and 1976. Obama won reelection while Ford lost. The average incumbent October was +0.32% which is slightly more than the average October in an uptrend. The largest gain was +2.61% in 1996 and the largest loss was 1976 with -2.22%. In other words, incumbent Octobers have been unusually quiet.
I know. I know. It just doesn’t fell quiet now. Implied volatility is inflated which means investors are positioned and paid up for protection. And my top scenario still calls for one more decline into the second or third week of the month for the final low. We will see how it all shakes out shortly. If my scenario is to be correct, the stock market should be peaking over the coming few days.
Don’t forget that I have a pretty cool model that forecasts presidential elections based on stock market performance over three time periods leading up to the day. The track record has been really good with only one incorrect call in 1992. I will have more on this later in the month.
