Is October Really That Bad?

Some  analysts and financial journalists have been highlighting the ‘divergence'  between the larger cap and smaller cap stock indexes as evidence the markets may be in trouble, or as one current article on MarketWatch.com is titled, “Is the stock market bubble of 2014 ready to burst?”

Allow me to present another interpretation. What time of year is it? It is fall. And what comes after fall? The end of the year. And what are thousands of financial analysts and institutional traders, who want to keep their clients and attract new ones thinking about? They are focused on their year-end results. It is the year-end results upon which countless salaries, bonuses, and even whole businesses are based.

And if it is late September going into the final quarter, how would you prop up your year-end results?

The Russell-2000, the index of smaller-cap stocks, is down 3.5% for the year. But, over the 14 weeks remaining until year-end, the Russell has averaged a 5.9% gain.

The S&P-500, the index of larger cap stocks, is up 7.4% this year. Over the next 14 weeks, the S&P has averaged a 4.4% gain.

And then there's the NASDAQ Composite, the tech-laden index. The NASDAQ has gained an average 7.5% over the next 14 weeks (it currently is up 8.5% for the year).

So if you wanted to prop up your year-end results each year, what type of stocks are you most likely to focus on in the final quarter? Maybe tech stocks, or other fast-growing stocks often found on the NASDAQ?

The current divergence between the smaller-cap stocks and the larger market may be little more than a seasonal event playing out.

But what about October? Isn't that a dangerous month to be in the market? What lies in store for us?

Let's look at the current market and the track record of the general market over the next several weeks.

The S&P 500's recent retreat, so far, appears to be nothing more than an on-time short-term cycle pullback. Friday's strong reversal in many stocks may be the start of the typical rebound from the typical short-term cycle low.

We will learn this week whether a cycle low has indeed been set. Now what about the S&P's history over the next several weeks?

The following chart shows the track record of the S&P 500 over the next 6 weeks. It shows that the index has averaged a 1.5% gain, with gains in 71% of the years. After we get past October, the average gains start increasing (possibly from institutions attempting to prop up their year-end results each year).

So far October doesn't look that bad for the markets, or at least the S&P 500 index.

But let's take a closer look at the results. The market crashes in 1987 and 2008 were very large moves compared to all the other years. One can view them in context as one-time events that are not a normal part of market activity (Lehman Bros.-type institutions don't collapse every year or so). After removing the two unusual years, we're left with 33 years of results, and the average gain now jumps to 3.0%.

So over all the years since the late 70's, where ‘black swan' events didn't happen, the S&P 500 has averaged a 3% gain over the next 6 weeks. It's odd that the financial press doesn't mention that fact when hyping the ‘perils' of October.

One more thing about the above chart. Take a look at the individual years. After removing 1987 and 2008, notice that the remaining losses were -7%, -1.5%, -2.9%, -0.1%, -1.9%, -5.3%, -4.8%, -4.2%. Only 2 were 5% or more.

But the next 6 weeks have produced many good gains, with 13 years of 5% or greater gains.

Another ‘black swan', or as market analysts seem to say all too often, ‘a once in a 100 years event', could start tomorrow. But without such an event, the market actually has a good track record for October.

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, please click on the following link: www.markettamer.com/seasonal

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2014 Stock & Options Training LLC

Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.

Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.

Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.

As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.

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