Once again the month of October has delivered a highly volatile market. And though it isn’t historically the worst month for trading, October’s bearish lows historically prove to be a bullish launching point for the next six months.
A recent article by Forbes highlights a few reason why that is case. According to Forbes, “The Stock Trader’s Almanac” says the Dow has been up an average of 0.7 percent in October since 1950, while September returns average .07 percent, making it the worst month for trading. August holds the second-lowest average of 0.20 percent for Dow returns.
Despite horrific happenings in 1929, 1987 and 2008, October is more of a bear-killer than a bull trap. Hirsch’s father, Yale Hirsch, started writing about the “best six months” strategy in 1986, noting how the November-through-April period had delivered the majority of the market’s gains, while the May-through-October period was a net drag on returns.
History bears out the idea. Imagine two investors, each with $10,000, who started investing in the Dow Jones Industrial Average in 1950 — one exclusively in the May-October period and the other exclusively in the November-April period (each 100% in cash for the six months not in the market). Over the next 68 years, the May-October investor would have gains of $1,031, while the November-April investor would have profits totaling $1,008,721.
Steve Todd of “Todd Market Forecast” is particularly bullish on stocks, Forbes says, noting the extremes of bearishness and headlines in options markets, where put-buyers are scrambling for protection.
“The 10-day moving average of the CBOE put call ratio is very high and bullish,” writes Todd. “This chart tells me that we have weeks and perhaps months on the upside, and it looks like it will coincide with favorable seasonality, which officially begins in November.”
Company Earnings Top Expectations but Still No Respect?
About 10 percent of S&P 500 companies reported 3Q earnings, with 90 percent of those companies beating expectations — far exceeding the 71 percent five-year average — but only half of those companies have seen positive stock-price reaction.
According to Earnings Insight from FactSet, companies beating EPS estimates this earnings season have seen an average decline of 2.3%, compared to a 1% gain, on average, over the past five years. Companies reporting negative earnings surprises have suffered an average stock price drop of 4.0%, starting two days before the release and ending two days after the results. This is more severe than the five-year average decline of 2.5% for companies missing their numbers.
Forbes concludes that you can generally find quite a few stocks that look like attractive buys, but when value matches insider buying, it’s always a bonus that boosts your odds of success.