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October Effect: Market Tops and Bottoms Since 1950

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    October 15, 2012

    We’re now at an early point in the Q3 2012 earnings season, which happens, of course, in October, historically the most volatile month in the U.S. stock market. Let’s step for a moment into the realm of market trivia and consider the October Effect in the stock market. October is the month that has, by far, hosted the most major market bottoms — five of the ten in the chart below. As for market tops, October has hosted only one since 1950, the all-time high on October 9, 2007 — the fifth anniversary of which we celebrated on Tuesday.



    In terms of average monthly performance, here’s a chart illustrating the behavior of the months since 1950. September has the worst track record. October is somewhere in the middle of the pack.



    But now let’s consider monthly volatility, by which I mean the percent change from intra-month lows to intra-month highs. The adjacent table clearly documents the volatility of October, the highest of the twelve. A survey of all the months with 10% or more intra-month volatility puts October at the top, as does a ranking by the average intra-month volatility.

    So if you don’t like volatility, you’ve traditionally been happier when Halloween is a memory.

    Note: The 1950 start date uses spiced data from the S&P 90 for the index prior to the launch of the 500 in March 2009. This is the widely used data series made available by Yahoo Finance. The troughs in the first chart are based on daily closes with a -20% or more qualifier, with one concession — the 19.9% decline in 1990, which would have been greater if we were using intraday highs and lows.





    Images: Flickr (licence attribution) 

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.