OCTOBER is the first month Quarter Four. It is the sixth and final month in the volatile half of the DJIA and S&P500’s trading year and the fourth month of NASDAQ’s four out-of-favour months. It is also the month that start Q4’s Earnings Season for Q3’s results.
October 2020 has 22 trading sessions and one Bond Market holiday. October tends to start out mildly bullish then goes into some serious volatility in the second week. The month then tends to become very bullish in the second half of the month with slight volatility in the final week before closing out the month in bullish fashion.
In the last decade, October has been bullish (on DJIA) with occasional losses that range from -0.75% (2016) to huge draw downs of -5.58% (2018). Over the last ten years, only three Octobers were down (2012, 2016 and 2018) while seven were up including a huge +9.56% gain in 2011 and +8.51% in 2015. Including those huge gains in 2011 and 2015, the average gains of the seven years have been +4.35%. Last year, October finish with a modest +0.31% gain, the smallest gain in the last ten years.
The last ten years’ statistics don’t reveal the full extent of October’s wrath when it makes one of its famous single-day crashes.
October has a dark reputation known as the “October Effect” because of what it has done to historical markets that were overbought, bubbled and troubled;
- The Bank Panic of 1907
- The Stock Market Crash of 1929
- Black Thursday – October 24, 1929 (-11.0%)
- Black Monday – October 28, 1929 (−12.8%)
- Black Tuesday – October 29, 1929 (-11.7%)
- Black Monday – October 19, 1987 (-22.6%)
For the record …
“Black” days are when the stock market experienced single session declines of large magnitudes. Not all Black days were in October. For example, there have been four Black Mondays in the last 100 years. They were Oct. 28, 1929, Oct. 19, 1987, the market correction of Aug. 24, 2015, and most recently, March 9, 2020.
It was only twelve years ago that we had two of those infamous crashes.
On Monday, Oct. 6, 2008, the DJIA dropped 800 points, closing below 10,000 for the first time since 2004. From October 6–10, 2008, the DJIA closed lower in all five sessions. Volume levels were record-breaking. The DJIA fell over 1,874 points, or 18%, in its worst weekly decline ever on both a points and percentage basis. The S&P 500 fell more than 20%.
And then there was this …
On October 24, 2008, many of the world’s stock exchanges experienced the worst declines in their history, with losses of around 10% amongst most indices.
Having said that …
The October Effect is actually only a market anomaly where investors believe that stocks tend to decline during the month of October. It is more a psychological expectation rather than an actual phenomenon because October is statistically more bullish than bearish. In fact, October has another reputation which is more accurate in that it is a “Bear-Killer Month”.
So although October is generally more bullish than bearish over most timeframes, one should never be complacent especially when the market and/or economic circumstances are dire, desperate and distressed as they are today.
Since its inception in February 1998, the October returns on the SPDR Dow Jones Industrial Average ETF (DIA) have been 61.18% for an average gain of +4.75% while offering 31.82% for a -3.36% declination.
The SPDR S&P 500 Trust’s (SPY) 27 year record for October is 70.37% for an average gain of +4.61% while offering 29.63% for a -3.85% declination.
The sectors for being bullish in October are:
- Staples (XLP, 76.19% for an average gain of +3.98%, average losses at -2.81%) over 22 years since January 1999
- Utilities (XLU, 76.19% at +3.96%, -5.16%) which is not very bullish compared to the losses when bearish since December 1998
- Financials (XLF, 71.43% at +7.57%, -5.61%) since December 1998
The only sector that has any kind of bearish bias is Consumer Retail (XRT) with a 50%-50% probability for a +5.11% gain versus a -6.00% loss since June 2006.
An interesting observation is Homebuilders Select Industry Index (XHB). It has the worst losses of any sector when the market went down. of the last 14 years (inception date: January 2006), XHB made an average +6.65% gain 57.14% of the time, while losing a massive -9.38% from the 42.86% that it went down. Given the timeframe of this ETF, I’d say a lot of the fault came from its capitulation during the Sub-Prime Mortgage Crisis.
WEEK 40: 28 SEPTEMBER TO 02 OCTOBER 2020
- Week 40 starts bullish, becomes very bearish midweek and ends bullish
- The last day of September (Wed, 30) has been down on S&P 15 of the last 22
- The first trading day of October (Thursday) has been down on DJIA 8 of the last 14
According to our 5, 10 and 15 year seasonal models for the Benchmark ETFs (DIA, SPY, QQQ):
Benchmarks Indices ($DJIA, $SPX, $COMP) (21 year average) for Week 40:
- $DJIA is usually very bullish on Monday, bullish on Tuesday, very bearish on Wednesday, bearish on Thursday then bullish on Friday.
- $SPX is expected to be very bullish on Monday and Tuesday, very bearish on Wednesday and bullish on Thursday and Friday.
- $COMPQ is normally bearish from Monday to Thursday and bullish on Friday.
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WEEK 41: 05 TO 09 OCTOBER 2020
- The second week of October sees some wild swings
- in 2008, DJIA lost 18.2% on the week ending October 10 to mark the worst week in the history of Wall Street.
According to our 5, 10 and 15 year seasonal models for the Benchmark ETFs (DIA, SPY, QQQ):
Benchmarks Indices ($DJIA, $SPX, $COMP) (21 year average) for Week 41:
- $DJIA and $SPX are usually very bullish on Monday, bullish on Tuesday, very bearish on Wednesday, slightly bearish on Thursday and mildly bullish on Friday.
- $COMPQ is normally extremely bullish on Monday, bullish on Tuesday, bearish on Wednesday, and mildly bullish on Thursday and Friday.
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WEEK 42: 12 TO 16 OCTOBER 2020
- Monday 12, October – Bond Market Closed in observance of Columbus Day
- The third week of October starts bearish and turns bullish midweek
- October Expiration Friday has been down on DJIA 9 of the last 16 including six straight between 2005 and 2010
According to our 5, 10 and 15 year seasonal models for the Benchmark ETFs (DIA, SPY, QQQ):
Benchmarks Indices ($DJIA, $SPX, $COMP) (21 year average) for Week 42:
- $DJIA and $SPX are usually bearish on Monday, very bearish on Tuesday, very bullish on Wednesday, mildly bullish on Thursday and very bullish on Friday.
- $COMPQ is normally mildly bullish on Monday, bearish on Tuesday, very bullish on Wednesday, bearish on Thursday and quite bullish on Friday.
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WEEK 43: 19 TO 23 OCTOBER 2020
- The week after October Expiration Friday tends to be flat and slightly bullish
- October 19, 1987 saw the DJIA tank 22.6% in a single session
According to our 5, 10 and 15 year seasonal models for the Benchmark ETFs (DIA, SPY, QQQ):
Benchmarks Indices ($DJIA, $SPX, $COMP) (21 year average) for Week 43:
- $DJIA is usually bullish on Monday and Tuesday, bearish on Wednesday then bullish again on Thursday and Friday.
- $SPX and $COMPQ are expected to be bullish from Monday to Friday.
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WEEK 44: 26 TO 30 OCTOBER 2020
- The final week of October is prone to wild swings
- The week begins bearish and turns bullish into the end of the month
- October 29 is the 88th Anniversary of the 1929 Crash when the DJIA lost 23% in two days – 28 and 29 October, 1929 – that started the Great Depression.
- Sunday, November 01, 2020 – Daylight Saving Time Ends (U.S. Markets will, thereafter, open at 22:30pm SG and MY and close at 05:00am SG and MY)
According to our 5, 10 and 15 year seasonal models for the Benchmark ETFs (DIA, SPY, QQQ):
Benchmarks Indices ($DJIA, $SPX, $COMP) (21 year average) for Week 44:
- $DJIA and $SPX are expected to be very bearish on Monday then fairly bullish for the rest of the week.
- $COMPQ is usually very bearish on Monday, bearish on Tuesday then bullish for the rest of the week.
September Lives “Up” To Its Reputation
Last month …
Then it all came apart in the first week of September and sent all the major indices below their respective 50DSMAs.
For the rest of the month, DJIA, SPX and COMP remained rooted below that critical technical indicator right up till the very last day on Wednesday 30 September.
NASDAQ’S UGLY START
In a September 08 article from MarketWatch titled, “When the Nasdaq has had as ugly a start to September as it just had, it has always finished the month lower” in which is was mentioned;
“When the Nasdaq has previously tumbled by at least 4% in the first five days of September, it has ended lower. The Nasdaq has booked five Septembers since 1974 (not including Tuesday’s drop) in which it registered declines of at least 4%, and in four of those five declines – 1974, 2000, 2001 and 2008 – the equity benchmark added to its losses.“
From the 1st (11,939) to the 8th (10,847) of September 2020, NASDAQ lost -9.15%.
At the close of Wednesday, 30 September, NASDAQ was down -6.47% for the month.
I guess that makes it five out of six declines – 1974, 2000, 2001, 2008 and 2020. I know all those other years were synonymous with historical drama. Now we add 2020 to that fray. The question is; is it over yet?
MACROECONOMIC UPDATE
Brazil and Italy became September’s first casualties, falling into recession after clocking a YonY -11.4% and -17-7% contractions respectively in the second quarter following a -3% and -5.6% contractions the previous quarter.
But the highlight of the first two days of September had to be Australia’s fall into recession for the first time in 30 years.
Australia, Brazil and Italy join a host of other major economies (in double-quarterly YonY contractions) including (and not limited to); U.S., U.K. (-21.7%), Switzerland, Germany (-11.3%), Spain (-21.5%), France (-19.0%), Austria, Belgium, Denmark, Finland, Netherlands, Mexico (-18.7%), Argentina, Philippines (-16.5%), Thailand, Hong Kong, Japan, Iran, Saudi Arabia, South Africa, New Zealand and Singapore (-13.2%).
In week 37, Japan became the first major economy to register three consecutive YonY contractions when they announced a drawdown of 9.90 percent in the second quarter of 2020 over the same quarter of the previous year.
Last month, I said;
“The most uncomfortable thing about this market for me is that the VIX is staying elevated above 20 points. This translates as a steady and heavy amount of hedging on Options. Something is definitely amiss when you have a bull run on weak macroeconomic numbers on lower volumes and higher hedges … Now that August is done and dusted without selling off in any way, it’s left to September to do its worst.“
For the whole month, the VIX remained above 25.00, peaking at 38.28 after closing at the month’s high of 33.60 on September 3rd. Support was either on the 25.00 point level or the 50DSMA.
With all three benchmarks posting losses for September, October now proposes to be a bear-killer month rather than a crash month. The indexes tend to rise in the following month 70% of the time after losses as severe as September this year, based on the last 10 periods in which the Dow marked a decline of at least 2%, the S&P 500 marked a September slide of at least 3.5%, and the Nasdaq Composite logged a drop in the ninth month of the year of at least 4.5%. The last time any of those main benchmarks posted as ugly a September performance was 2011, during the European sovereign debt crisis.
Adding another layer of confusion to the fray are the self-fulfilling prophecies for 2020 so far;
Although there are more reasons to be bullish, the stand out stat is the January Barometer and the December Low indications which have a 100% accuracy in the last four decades unless the government intervened with stimulus as were the cases in 2003, 2009 and 2012.
Too much noise and very low volumes are never a good mix for the market and its bulls. Once again, caution is the watchword for the month. Take the ride up by all means but be ready to switch opinions because October is never a month to take your eye off the ball.
Happy Hunting!!
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