A Month with a Bad Reputation

A certain degree of nervousness tends to suffuse global financial markets when the month of October approaches. The memories of sharp slumps that happened in this month in the past – often wiping out the profits of an entire year in a single day – are apt to induce fear. However, if one disregards outliers such as 1987 or 2008, October generally delivers an acceptable performance.

 

The road to October… not much happens at first – until it does. [PT]

 

Nevertheless, the prospect of such an extremely strong decline is scary: what use is it to anyone if markets typically perform well in October most of the time, when  the phenomenon of the gains of an entire year evaporating in the blink of an eye is repeated? What about intermittent losses? We will apply seasonal analysis to the issue in order to shed light on whether one should adopt a risk-averse stance in October.

 

The Biggest Crashes Tend to Happen in October

Let us take a look at the largest declines in recent history. The following chart shows the twenty largest one-day declines in the Dow Jones Industrial Average. Crashes that occurred in October are highlighted in red.

 

The largest one-day declines in the DJIA in history – almost half of the crash waves occurred in October,  including the two largest ever recorded on 19 Oct. 1987 and 28 Oct. 1929. The fourth largest decline happened on 29 Oct. 1929 hence these two days of consecutive declines were actually worse than the record one-day plunge in 1987 (similar to 1987, the market had already fallen sharply in the week immediately preceding the crash). [PT]

 

9 of the 20 strongest one-day declines happened in October. That is an extremely disproportionate frequency. In other words, October has a strong tendency to deliver negative surprises to stock market investors in the form of sudden crashes. What does this mean for us as investors?

 

What to Make of Exceptionally Large Gains?

First of all, the first half of the year appears to be much safer from sudden declines. Only two of the 20 largest one-day losses happened in these six months.

But what is the takeaway for us? We must not allow to let ourselves be deceived. Even though such extreme price declines are rare, they do exhibit seasonal tendencies as well. Although it is more likely in most years that gains rather than losses are generated, the losses frequently turn out to be exceptionally large.

 

October Isn’t All That Bad

Despite the fact that large price declines frequently happen in October, it is at the same time not a weak month on average. We have used the Seasonax App to carry out a seasonal analysis for the Dow Jones Industrial Average. The results are depicted in the seasonal chart below.

Contrary to standard price charts, seasonal charts do not show actual prices over a specific time period. They rather show an average of prices over a large number of years in relation to the time of the year. The chart on the following page illustrates the average annual price pattern of the DJIA calculated over a span of 29 years.

 

DJIA – a detrended seasonal chart over the past 29 years. Overall, the market tends to move sideways in the month of October, with a slight upward bias. In fact, more gains than losses were posted in the past 29 years, and if one had held a long position in every year, one would have come out ahead with a (below-average) cumulative profit despite the 2008 massacre. Note however that this is predicated on the average weakness of the month of September, which is typically the weakest month of the year. Although this is not part of this study, we would suggest that it is probably fair to assume that in years in which September was relatively strong it will be more difficult to achieve additional gains in October. [PT]

 

The chart illustrates the typical seasonal price pattern of the DJIA. As can be seen, statistically the weakest month is actually September rather than October (see also: “September – the Most Dangerous Month to Invest”).

In the course of October the market tends to move sideways on average. Net-net it even exhibits a small gain, albeit a well below average one. Nevertheless, October delivers a better average performance than its reputation among stock market participants would suggest.

Of course this reputation is not entirely undeserved, given that it stems from the fact that particularly large short term declines actually do frequently occur in October.

 

Try out our Web Application to Perform Seasonal Analysis

This seasonal analysis was carried out with the aid of our web application, which was launched several months ago. One no longer has to have access to Thomson Reuters Eikon or a Bloomberg terminal, instead this version can simply be accessed via a normal web browser.

In short, we have made this powerful tool for analysis available to anyone with a functioning internet connection! Simply access the Web App of Seasonax here  and give our free patterns a try. It will help you optimize your portfolio with a view toward avoiding or reducing exposure to extreme seasonal risks.

 

Addendum by PT: Mid-Term Election Seasonal Pattern

The chart below shows the seasonal chart of the SPX in mid-term election years over the past three decades. As you can see, the market typically declines into October 9, after which a powerful seasonal rally begins.

 

In the 7 mid-term election years since 1990, the SPX delivered a powerful end-of-the-year rally 6 times. In the only losing year 1994 it posted a mere 0.02% loss.

 

The seasonal chart of mid-term elections since 1990 suggests a high likelihood of a strong rally. However, something is different this year: the pattern of the stock market looks markedly different from the average mid-term pattern. Compare this year’s SPX chart to the seasonal chart:

 

The SPX pattern in 2018 to date looks almost like a mirror image of the “normal” seasonal pattern in mid-term election years. Somehow it seems unlikely that it will deliver the typical seasonal strength at year-end, which normally tends to begin from “oversold” levels.

 

Not only does the 2018 pattern so far look like the exact opposite of the typical mid-term election year pattern, but the markets are also faced with a large reduction in central bank liquidity injections from October onward (“QT” by the Fed increases to USD 50 billion per month, while the ECB is cutting QE in half from EUR 30 to EUR 15 billion per month). This suggests that there is a strong possibility that the pattern will continue to run opposite to the usual seasonal trend this year.

 

Dimitri Speck specializes in pattern recognition and trading systems development. He is the founder of Seasonax, the company which created the Seasonax app for the Bloomberg and Thomson-Reuters systems. He also publishes the website www.SeasonalCharts.com, which features selected seasonal charts for interested investors free of charge. In his book The Gold Cartel (published by Palgrave Macmillan), Dimitri provides a unique perspective on the history of gold price manipulation, government intervention in markets and the vast credit excesses of recent decades. His ground-breaking work on intraday patterns in gold prices was inter alia used by financial supervisors to gather evidence on the manipulation of the now defunct gold and silver fix in London. His Stay-C commodities trading strategy won several awards in Europe; it was the best-performing quantitative commodities fund ever listed on a German exchange.

For an introduction to the Seasonax app and in-depth information on what the app can do click here . Furthermore, here is a complementary page on the web-based Seasonax app , which costs less and offers slightly different functionality (note: subscriptions through Acting Man qualify for special discounts – for both the Bloomberg/Reuters and the web-based versions of the app! Details are available on request – simply write a note to info@acting-man.com with the header Seasonax!).

 

Chart sources: “Sizzlers and Fizzlers” Seasonax Web App, Seasonax Bloomberg App, StockCharts

 

Chart & image captions, editing & addendum by PT

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

One Response to “How Dangerous is the Month of October?”

  • Hans:

    Thread of the month, Mr Speck. The market appears to
    be in a full blown correction and then some.

    The last Central Bank interest increase was unwarranted,
    with perhaps the intention to effect the national elections.

    Staying long. Good for Au as well.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Is the Canary in the Gold Mine Coming to Life Again?
      A Chirp from the Deep Level Mines Back in late 2015 and early 2016, we wrote about a leading indicator for gold stocks, namely the sub-sector of marginal - and hence highly leveraged to the gold price - South African gold stocks. Our example du jour at the time was Harmony Gold (HMY) (see “Marginal Producer Takes Off” and “The Canary in the Gold Mine” for the details).   Mining engineer equipped with bio-sensor Photo credit: Hulton Archive   As we write these...
  • Oil Mania Redux
    Positive Energy By now, late September of 2018, it has become increasingly evident that something big is about to happen. What exactly that may be is anyone's guess.  But, whatever it is, we suggest you prepare for it now... before it is too late.   Art auction energizer: Norman Rockwell's portrait of John Wayne. You can't go wrong shelling out top dollar for me, pilgrim, can you? [PT]   Several weeks ago, if you haven't heard, an undisclosed rich guy enthusiastically...
  • Fed Credit and the US Money Supply – The Liquidity Drain Accelerates
      Federal Reserve Credit Contracts Further We last wrote in July about the beginning contraction in outstanding Fed credit, repatriation inflows, reverse repos, and commercial and industrial lending growth, and how the interplay between these drivers has affected the growth rate of the true broad US money supply TMS-2 (the details can be seen here: “The Liquidity Drain Becomes Serious” and “A Scramble for Capital”).   The Fed has clearly changed course under Jerome Powell...
  • The Gold Standard: Protector of Individual Liberty and Economic Prosperity
      A Piece of Paper Alone Cannot Secure Liberty The idea of a constitution and/or written legislation to secure individual rights so beloved by conservatives and among many libertarians has proven to be a myth. The US Constitution and all those that have been written and ratified in its wake throughout the world have done little to protect individual liberties or keep a check on State largesse.   Sound money vs. a piece of paper – which is the better guarantor of liberty?...
  • Fed President Kashkari Hears Voices – Are They Lying?
      Orchestrated Larceny The government continues its approach towards full meltdown. The stock market does too. But when it comes down to it, these are mere distractions from the bigger breakdown that is bearing down upon us.   Prosperity imbalance illustrated. The hoi-polloi may be getting restless. [PT]   Average working stiffs have little time or inclination to contemplate gibberish from the Fed. They are too worn out from running in place all day to make much...
  • Switzerland, Model of Freedom & Wealth Moving East – Interviews with Claudio Grass
      Sarah Westall Interviews Claudio Grass Last month our friend Claudio Grass, roving Mises Institute Ambassador and a Switzerland-based investment advisor specializing in precious metals, was interviewed by Sarah Westall for her Business Game Changers channel.   Sarah Westall and Claudio Grass   There are two interviews, both of which are probably of interest to our readers. The first one focuses on Switzerland with its unique, well-developed system of  direct...
  • US Stocks and Bonds Get Clocked in Tandem
      A Surprise Rout in the Bond Market At the time of writing, the stock market is recovering from a fairly steep (by recent standards) intraday sell-off. We have no idea where it will close, but we would argue that even a recovery into the close won't alter the status of today's action – it is a typical warning shot. Here is what makes the sell-off unique:   30 year bond and 10-year note yields have broken out from a lengthy consolidation pattern. This has actually surprised us, as...
  • Decapitation Strike -  Elon Musk in the Crosshairs of the Bureaucracy
      The Most Expensive Tweet of All Time He finally done did it this time – this is to say, he did himself in. It was already widely known that Elon Musk sent out one tweet too many in early August. But it seems now that what he posted on that fateful day may well end up as the most expensive sequence of nine words ever blasted over the intertubes. For those who haven't followed the story, this is the tweet in question:   Elon Musk's fateful tweet – here is a link to the thread...
  • Are Credit Spreads Still a Leading Indicator for the Stock Market?
      A Well-Established Tradition Seemingly out of the blue, equities suffered a few bad hair days recently. As regular readers know, we have long argued that one should expect corrections in the form of mini-crashes to strike with very little advance warning, due to issues related to market structure and the unique post “QE” environment. Credit spreads are traditionally a fairly reliable early warning indicator for stocks and the economy (and incidentally for gold as well). Here is a...
  • Choking On the Salt of Debt
      Life After ZIRP Roughly three years ago, after traversing between Los Angeles and San Francisco via the expansive San Joaquin Valley, we penned the article, Salting the Economy to Death.  At the time, the monetary order was approach peak ZIRP.   Our boy ZIRP has passed away. Mr. 2.2% effective has taken his place in the meantime. [PT]   We found the absurdity of zero bound interest rates to have parallels to the absurdity of hundreds upon hundreds of miles of...
  • How Dangerous is the Month of October?
      A Month with a Bad Reputation A certain degree of nervousness tends to suffuse global financial markets when the month of October approaches. The memories of sharp slumps that happened in this month in the past – often wiping out the profits of an entire year in a single day – are apt to induce fear. However, if one disregards outliers such as 1987 or 2008, October generally delivers an acceptable performance.   The road to October... not much happens at first - until it...
  • Yield Curve Compression - Precious Metals Supply and Demand
      Hammering the Spread The price of gold fell nine bucks last week. However, the price of silver shot up 33 cents. Our central planners of credit (i.e., the Fed) raised short-term interest rates, and threatened to do it again in December. Meanwhile, the stock market continues to act as if investors do not understand the concepts of marginal debtor, zombie corporation, and net present value.   The Federal Reserve – carefully inching forward to Bustville   People...

Support Acting Man

Item Guides

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com