The Truth About the Dreaded Month of October
Today, I want to talk about stock market timing, and let’s start by talking about the market’s checkered October history.
October has always had a mystical, tense feeling about it when it comes to the stock market. Something always seems to happen in October, and big moves and news are commonplace.
Of course, October is most notable for its horrifying stock market declines. 1929 and 1987 are probably the most notorious years, as both years brought historic market crashes. But many other years had big downmoves too, including 1997, 1998, 2002 and 2008. So it’s not surprising that many investors steer clear or pare back during the month.
However, I’m here to tell you October is one of my favorite months. Why? Because October has had more major marketbottoms (i.e., excellent buying opportunities) than any month in history!
First, the numbers: Since 1980, October has actually been positive two-thirds of the time (24 of 36 years), with an average return of 1.2% for the S&P 500. Moreover, when you look at the details, you find that only two of the past 36 Octobers had meaningful declines: 1987 (-22%) and 2008 (-17%). The next worst was -3.5%, with all other losing Octobers coming in at -2% or better.
Plus, it turns out November and December are historically two of the best months of the year (both up 1.4% on average), meaning lows in October often lead to sustained market advances!
Like most stock market lore, there’s both truth and exaggeration to the fear of October—yes, there have been a couple of major declines that wiped out a lot of wealth, but they’re extremely rare, and afterwards, the bulls tend to take control.
Follow the Market, Not the Calendar
Despite those facts, October almost always results in plenty of investor nail biting, especially when there are big, headline-grabbing uncertainties ahead. And we certainly have plenty of those today! From the Federal Reserve’s interest rate policy to the U.S. election next month to recent worries about Deutsche Bank’s solvency, there’s lots to worry about.
But the big secret is this: If you have a proven, time-tested market timing system, you don’t have to freak out simply because of the calendar.
For proof, let’s look at the two enormous down Octobers I mentioned above. In 1987, Cabot Growth Investor’s Model Portfolio had more than 50% in cash entering October. Back then, interest rates were the biggest influence on the market, and our Power Index (which measured changes in short-term rates) had been negative for months, prompting us to stay mostly on the sidelines. Our issue just before the crash was titled, “Remain in Your Storm Cellar!”
In 2008, the Model Portfolio was even more defensive—we had 90% in cash in early September and stayed there as the market imploded all fall! All of our market timing indicators during that time were clearly negative, so we sat on the sideline and avoided the meltdown.
So even if we do run into a horrid October, you’ll get the signal to get out if you’re following a good market timing system—like the one Cabot Growth Investor has been following for more than four decades!
A Big-Cap Leader That’s Emerging Now
So what’s my market timing system saying about this October (and beyond)? In the short-term, the trend remains neutral, and that does open up the possibility of a retreat or shakeout.
However, I’m most impressed with the fact that (a) my long-term trend following measure is clearly bullish, (b) my broad market indicator is looking great, with very few stocks hitting new lows, and (c) most growth stocks, sectors and indexes are acting very resiliently.
In fact, the title of last week’s Cabot Growth Investor was “Growth Stocks Take Pole Position,” as I think many stocks are prepping to lead a sustained advance once the market can get going. I’m currently about 70% invested as I wait for the bulls to retake control of the market.
As for stock ideas, a “new” big-cap leader that’s on my Watch List is Las Vegas Sands (LVS), which looks like it’s emerging into a new uptrend after a couple of awful years. The reasons are twofold.
First, because of some stabilization in Macau—gaming in August reached its highest non-holiday-month total since April 2015, and the industry saw year-over-year growth of 7% in September.
The second reason: The company itself has a catalyst—Sands opened its new Parisian Macau Resort on September 13 on the Cotai Strip, complete with 100 table games, five restaurants, a health club and a theater. The combination has investors thinking Sands’ cash flow should surge going forward, solidifying the stock’s 5% dividend yield.
I featured LVS as my Top Pick in Cabot Top Ten Trader about a month ago, and it’s off to a good start for us. But the important part is finding low-risk entries going forward and knowing how to handle the stocks during their runs. For that, you should give Top Ten a try, and get advice on LVS and all the market’s leading stocks each week!
