October 1, 2009

One thing thats always attracted me to the stock market is that it has a long and storied history.  In fact, I vividly remember, when I first began working for Cabot back in 1999, eating lunch at our firms picnic table every day and re-reading 30 years of Cabot Market Letters. which we have archived in the office.

Of course, as a history buff, my first move was to go back and look up all the dates of major, jaw-dropping eventsthe 1973-1974 bear market, the 1982 blast-off, the 1987 crash, the 1990 bear market and others.  Reading the Letters from these years was like taking part in an adventure without any financial risk, of course!

One of the most discussed themes in market history has to do with Octoberspecifically, that October is a month that the market crashes.  And, unlike a simple myth, theres a lot of truth to the October crash crowd.  The 1929 and 1987 implosions remain forefront in investors minds, but there have also been numerous other October wipeouts, including the 550-point Dow drop in 1997, the 1998 Russian Ruble/Long-Term Capital Management debacle, and, of course, last years acceleration of financial panic from late September.

But as we know, the market is a contrary animal, and its succeeding in that respect once again.  As it turns out, Octobers history is nearly the exact opposite of what most investors believe!

Since 1958, October is actually the sixth-best month, right in the middle of the pack, with a 0.9% average gain for the S&P 500.  (For the record, September and February are the two worst months of the year, on average.)  Sixty percent of all Octobers have finished on the positive side of the ledger.

Moreover, instead of a month that ushers in crashes, October is actually a month that ends them.  According to Stock Traders Almanac 2009, October has marked the end of the 1946, 1957, 1960, 1962, 1966, 1974, 1987 (the decline actually started in August of 87), 1990, 1998 and 2002 bear markets.  In my opinion, it also marked the end of last years collapse, as the broad market bottomed in October (when 88% of the NYSE hit new 52-week lows).

Also, looking ahead, the months of November, December and January are three of the four best months of the year (April is the other).  Thus, far more often than not, October is a month to buy, not sell!

With that all said, Im not a huge believer in predicting what will happen this yearmaybe the market is topping out here and is set for a big slide, or maybe the market will keep trending higher throughout October.  My preference is to let the market decide and to interpret its decision with our indicators.

Right now, the intermediate- and longer-term trends are pointing up, and the broad market remains exceptionally healthy, so the odds favor higher prices ahead.  But the point is that, despite all the spooky legends, October is far more likely to offer treats than tricks.

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