Five Market Truths to Guide Your October Trading

It was a Jekyll and Hyde September for the market.

Things were good the first half of the month. The S&P 500 gained 4.2% through September 14, bucking the so-called “September effect” that makes the first month of fall the worst month to invest, historically.

But once the fervor over Apple’s (NASDAQ: AAPL) new iPhone and the Fed’s QE3 announcement subsided, stocks suddenly slipped the way they normally do this month. Eight of the last 10 trading sessions were down days, punctuated by a 1.6% drop-off on Monday and Tuesday of this week. Stocks are barely higher now than they were before the third round of quantitative easing was announced two weeks ago.

So where does the market go from here? It’s hard to say, given this month’s unpredictability. Best to turn to the historical trends for some guidance.

Here’s what we do know about past Octobers – straight from the Stock Trader’s Almanac. Perhaps this can provide at least a rudimentary vessel to help you navigate the choppy waters in the month ahead:

  • In presidential election years dating back to 1952, October is the worst trading month of the year
  • October is typically the final month of the “Sell in May, Go Away” theory, before the market makes a turn for the better in November
  • Late October is a good time to buy tech stocks and small cap stocks, which are typically beaten down to depressed levels in the early part of the month
  • The Monday before October options expiration (October 15 this year), the Dow Jones Industrial Average has gained 25 of the last 31 years. Conversely, the index has fallen six of the last seven years on expiration day – October 19 this year.
  • Beware of the October jinx: market crashes in 1929, 1978, 1979, 1987, 1988, 1997 and 2008 all occurred in October
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