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Opinion: September was a terrible month for stocks. Here’s what you can expect in October.


October in the US stock market holds a large size. Yet the month has only one way to survive up to its outward fame: it’s really particularly volatile.

Before I summarize the historical facts that support this reputation, I first read two Wall Street stories about October which became myths.

Myth # 1: October is the month of the biggest trend change

This is simply not true. According to the 1900 bull and bear market calendar conducted by Ned Davis Research, nine major trends in the U.S. market occurred in October. More comes with September 10, when November is tied to October with nine.

The average number of trend changes in all months is between six and seven. None of these three months totally differs significantly from the average.

The source of this myth may be a related belief that October is a so-called “bear killer”. It is true that an above-average number of bear markets on the Ned Davis Research Calendar ended in October: an all-month average between eight, vs. three-four. But this historical fact does not shed any light on the U.S. stock market in October of this year, unless you think the stocks are already in a bear market.

To be sure, the stock market may still feel a trend change this October. But if it is, it will not be because it is the tenth month of the year.

This is important to remember because it is human nature to interpret random events. For example, I argued a month ago that there is no good reason to expect September to be a bad month for the US market. My argument still stands, although the month turned out fairly for stocks with S&P 500 SPX,
-1.19%
4.8% reduction.

If I tell you that there is no reason to expect a coin to be reversed, you cannot conclude that I was wrong even if the coin made a head. The same principle applies here.

Myth # 2: October 6 is the end of the seasonal unfavorable period

In fact, it is not a complete myth. This is true of only one in every four years and 2021 is not one of them.

I’m referring to the famous six-month-on, six-month-off seasonal pattern known as “Sell in May and Go Away” and “Halloween Indicators”. As I wrote earlier, the statistical support for this pattern marks the third year of the so-called presidential election year cycle.

The third year of the presidential cycle dominates the “sell in May and go away” pattern so much that, after focusing only on the other three years, there is no statistically significant difference between the average May-October and November-April Dow Jones Industrial Average DJIA. The underlying data based on this is summarized in the table below,
-1.59%
Go back to his creation in 1896.

Average return from November to April

Average May-October return

Returns The difference in returns at the 5% confidence level is significant

All year

5.3%

1.9%

Yes

The third year of the presidential cycle

10.7%

0.0%

Yes

The first, second and fourth years of the presidential cycle

3.6%

2.5%

No.

Remember this month when you hear investment advisers try to mark the day of October where the gun-jumping good start at the official start of the Tu-Favorable Time is Halloween. In reality, since no seasonal pattern starts in November, there is nothing to jump on.

October is a particularly volatile month for stocks

With these two myths we can focus on what is true about October: It is the most volatile month in the calendar, as you can see from the chart below:

Contrary to the “May in Sale and Away” pattern of what we have sold, the average volatility above October is not just a one-year work of the presidential cycle. This is also consistent: if we halve the period since the creation of the Dow, October becomes the most volatile between the first and second half. Moreover, the month is at the top of the volatility rankings, even if we remove 1929 and 1987 from the sample – the years in which the two worst accidents in the history of the stock market occurred, both in October.

I am not aware of any theoretical explanation for why October should be so volatile, and would generally recommend ignoring any pattern for which such an explanation is missing. But higher volatility could be caused by something more than expected, so there’s a good chance that October’s reputation for volatility could continue.

There are several ways to invest. The first is to not allow yourself to be frightened by increasing instability. Hold on tight and don’t fall short of your investment strategy.

Second, for those of you who have a high appetite for risk, one or more exchange-traded funds may take a position that increases as volatility increases. One of the biggest assets under management is the iPath S&P 500 VIX short-term futures ETN VXX,
+ 0.07%.
Note that these products (and other exchange-traded products that benefit from volatility) are only suitable for very short-term trading, as these investments lose a small amount each day even when volatility remains stable.

Mark Halbert is a regular contributor to MarketWatch. His Halbert rating tracks investment newsletters that pay an equivalent fee for monitoring. He can be reached mark@hulbertratings.com

Also read: Why could stocks lose popularity as the market enters its ‘presidential election cycle’ in its second year?

Plus: The S&P 500’s power sector was the only port for stocks during the September storm.



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