Boo! October can be dangerous, but it can also bring riches

  • By Randall W. Forsyth,
  • Barron's
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“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” So wrote Mark Twain, who learned by hard experience the risk of plunging into equities. Despite the record of fearsome crashes in 1929, 1987, and most recently 2008, the seasonal volatility for which the month is known often provides an opportunity to buy.

In years preceding elections, the record for October is more equivocal. According to Jeffrey Hirsch, editor in chief of the Stock Trader’s Almanac, since 1950 October has been the second-worst month for the Dow Jones Industrial Average (.DJI) and the S&P 500 index (.SPX), with nine positive returns and eight negative ones, averaging minus 0.5% and plus 0.1%, respectively. But October also marks the end of the worst six months for those averages, so be alert for should there be a steep drop, given the fundamental and political stories churning in the background, he advises.

Another seasonal effect can be seen around the Jewish High Holy Days. Observant Jewish traders will often close out positions before Rosh Hashanah, the New Year, which begins Monday, and return to the market after Yom Kippur—Oct. 9 this year. Since the holidays change every year, the seasonal effect varies and is heavily skewed by 2008’s 17.76% drop during that period.

Doug Kass, who heads Seabreeze Partners, offers an alternative: Sell ahead of Rosh Hashanah, but wait to buy until Sukkot, which begins Oct. 14 and which he points out “is the only Jewish festival with the explicit commandment to rejoice, in the bounty of the earth during the fall harvest.” That bounty may be reaped from lower levels in the stock market, he adds.

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