- Last 20 years: October ranks second in monthly performance with an average gain of 1.86%
- Last 20 years: The average daily trend starts slow and finishes strong
- Last 20 years: October is the most volatile month
- Since 1950: October ranks 7th in monthly performance with an average gain of 0.89%
- Since 1950: October still is the most volatile month yet is higher almost 60% of the time
- Since 1950: If the S&P is up greater than 10% for the year, September was positive, and September hit a new high, the average return for the October-December period is 6.39% (9 prior instances)
We have a lot of data to sort through to shape a thesis heading into the fourth quarter. Clearly there is a bias to the upside as Q4 is historically the strongest quarter by far with an average gain of roughly 4% and higher 79.1% of the time. Also since 1950, the October to December 3-month rolling average is the second best streak only behind the very favorable Nov-Jan period. A nice stat courtesy of Steve Deppe via Wayne Whaley states:
"The S&P has been positive in each of the last six months. Since 1950, there have been 19 previous occasions of a down month and then six consecutive positive months and in all 19 of those setups, the S&P was higher either six of twelve months later, suggesting per this one study, that the odds of a Bear Market in the next 12 months is small."
To throw a wet blanket on all the good data, if we look at how the average October fares after a solid start to the year we get some conflicting signals. We wanted to see how October returns looked when the S&P was up greater than 10% year-to-date and September was positive which are the exact conditions heading into this October. The average monthly return for October is a loss of -0.78%. If we add that September made a new all-time high then October returns 0.33% which is well below the average October from the stats above. However, it finishes strong with a gain of another 6.39% for the rest of the year.
So how do we use this data to position our portfolios? The quantitative data from a seasonality point of view is just one in many data points that goes into our overall thinking but it certainly helps to frame an outlook. Let's take a look at some other measures;
The healthy uptrend remains as all four of the big US indexes are above their respective 20, 50, and 200-day moving averages and all are at new highs. In an impressive show of resilience, the S&P has been up 10 out of 11 months on a price only basis. It doesn't get much stronger than this from a trending perspective. If we narrow down to the 10 major sectors, 8 out of 10 reside above their 20, 50, and 200-day moving averages. We also track 9 foreign indexes and all are above their 200-day while the majority are above the 20 and 50-day moving averages. Equity markets across the globe are trending higher.
Breadth in the form of participation is also very healthy. The Russell 2000 has made the biggest jump in the last month as now almost 80% of issues are trading above their 50-day moving averages. The second chart below shows new lows across all markets have dried up while new 52-week highs are starting to accelerate. The advance-decline line is also making new highs confirming the strong breadth of this market. One area that concerns us on a shorter-term basis is the market entering overbought territory. The RSI (last chart bottom panel) is reaching levels that have previously caused some stalling action in the S&P during the run up since summer 2016.
Leadership has seen a rotation in the last few weeks as small caps and value have broken their underperformance as new money has positioned in these areas. The chart below compares growth vs value and the up-trend from the beginning of the year is now broken. This is something we'll be watching closely in the 4th quarter.
While the AAII Index remains in neutral territory the CNN fear and greed index's is flashing warning signals as it now stands firmly in overbought levels at extreme greed. This is way up from neutral one month ago.
Lastly we look at volatility. We now know that October is historically the most volatile month. However, according to our September stats blog we found that September was the second most volatile month in the last 20 years. If you follow stats blindly without taking into context the whole picture that statistic didn't help out too much. In fact, last month was the least volatile September ever recorded.
In summary, as we head into the fourth quarter we firmly believe in following the path of least resistance as the strength and momentum in this market could carry us to the end of the year. The prospect of tax reform getting done has continued to keep a bid in the market. Nonetheless, with elevated levels of sentiment and overbought conditions coupled with the historic volatility of October, we will keep some opportunistic cash sidelined as we enter earnings season. Outside of tech, we are seeing opportunities developing within the current rotation into banks, small caps, and the energy complex.
