Date: October 2, 2017

The Legend of October

A month ago, I wrote an article debunking the theory that September was always a poor month for the stock market. You can re-read it HERE. Essentially, September’s ire was very much dependent on how price came into the month. While the average return since 1928 has been -1.1%, coming into September 2017, price action suggested an up month with an average price of +0.50%. As I write this, the S&P 500 is ahead by 1.5% on the final day of September.
October, on the other hand has a different reputation, one of volatility, wild swings and the beginning of the most favorable time of year to invest. Most people remember the stock market crashes of 1929, 1987 and 1997. Bear markets died in 2002, 1998, 1990 and 1974. Overall, the month averages +0.50% since 1950 in good times and bad. Similar to September, that average return does not tell the whole story.
October is set to begin with all of the major stock market indices at or close to all-time highs, however volatility is close to all-time lows. Unlike most months when stocks start the month above their long-term trend (200 day moving average), October actually bucks the trend and shows some negativity after the first 5 days.
When the S&P begins October in an uptrend:
  • First 5 days average return +0.66%
  • Second 5 days average return -0.26%
  • Third 5 days average return -0.30%
  • Last 5 days average return -0.25%
The main takeaway is that October is very much front loaded for returns and caution is warranted as the month proceeds when it begins in an uptrend. On the contrary, October has very strong returns when beginning the month in a downtrend. With volatility almost non-existent right now, it’s unlikely that it will suddenly conform to historic norms and surge several hundred percent although a modest second half decline with higher volatility is the most likely path.

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Paul Schatz, President, Heritage Capital