Danger Awaits in October - or Does it?

Sep 24, 2018

Nervous feelings start to arise all around the global financial markets when October approaches. Investors fear the sharp declines that this month has brought in the past - wiping away the whole year's profits in a single day. However, looking at the numbers, October delivers an acceptable performance if outliers like 1987 or 2008 are disregarded. For you, as an investor, the prospect of such particularly strong declines is scary nevertheless: what use is it to anyone if markets perform well in October several times but previous gains simply evaporate in a one-off loss? We will use our seasonal analysis to shed light on whether to be risk-averse in October or not.

The biggest crashs tend to happen in October

Let’s take a look at the sharpest 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.

Extremely strong one-day declines happen in October more frequently. 
Source: "Sizzlers and Fizzlers"

9 of the 20 strongest declines occurred 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 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. While it is more likely that gains rather than losses are generated in most years, the losses frequently turn out to be exceptionally large.

October isn’t all too bad

Thus, while large price declines frequently happen in October, it is at the same time actually not a weak month overall.

We have used our application 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 price pattern of the DJA calculated over a span of 29 years.

On average the market moves rather sideways in October.
Source: Seasonax Web App

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 (and we have warned you about September in recent Seasonal Insights).

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, as it stems from the fact that particularly large short term declines actually do frequently occur in October

Carry out seasonal analysis through our Web Application

This seasonal analysis was carried out by using our web application, which we have launched for a couple of months now. Instead of having to have access to Thomson Reuters or Bloomberg terminal, you can simply access it through your browser.

We, thus, strive to make this powerful tool for analysis available to anyone with a functioning internet connection! Simply access app.seasonax.com and try our free patterns. This will also help you optimize your portfolio with a view toward avoiding or reducing exposure to extreme seasonal risks.