Keystone's October Seasonality for Trading the Markets

The cool Autumn days of October are here, and also time for Keystone to enjoy some pumpkin pie.  October is the notorious month that congers up images of market crashes and panic, leading to the Wall Street adage, "The October Effect." This effect is simply the perception that the market tends to do poorly in October.  Notable dates include The Panic of 1907 occurring in October, "Black Thursday" on 10/24/29, "Black Monday" on 10/28/29, "Black Tuesday" on 10/30/29 and "Black Monday" on 10/19/87, where the Dow Industrials dropped 23% in one day!

Returning to the seasonality aspects, the broad markets are up about 0.2% for the month of October, flatish, nothing to write home about but definitely not a large negative number which would be assumed considering the crashes and bad connotations that come with October. September, last month, ended as an up month which is uncharacteristic since it is typically a very bad month for stocks. Traders, however, were complacent during September, loaded on the bull side and not worried, and that turned out to be the correct call although the markets leaked lower as the month finished.

Technology and biotechnology sectors typically do well in Q4 (October-November-December) but both sectors have already ran a long ways.  Last year, the tech rally did not begin until December and then catapulted higher on AAPL earnings in mid-January--in Q1.  The quarter, Q4, is typically up 4.3%. October is not typically a good month for small caps (RUT) stocks. Many traders try to position themselves in tech during September and October to take advantage of the seasonality. This year appears to be a crap shoot due to the weak economic conditions now circling the globe and the rally that already occurred. October is the last month of the weak May thru October trading season. The largest gains in the market (on the long side) are made between November and April. Again, this year is an outlier since the markets have rallied strongly the last three months due to QE.

Gold is typically buoyant from August thru October with the India and China holiday events and marriage seasons. Diamonds, however, are now gaining in popularity. The coming Diwali season (11/13/12) of lights in India typically marks a pull back for gold. Typically a peak in oil prices will occur in October. This would be in line with the ongoing gobal weakness now occurring but the Middle East and Northern African oil-producing regions are erupting in turmoil, which will resist the negative seasonality. Gasoline prices are usually at their lows in the fourth quarter. The SPX is typically up the final couple days of this month. The results from the back-to-school sales help to project the holiday season sales. Anecdotal back-to-school sales can project holiday sales. Look for any indication that stores are starting to announce sales early since that would signal difficulty in moving merchandise.

Typically, market buoyancy occurs early October as the new quarter begins, with new money being put to work. The ECB Rate Decision and Press Conference is 10/4/12. The Jobs Report is 10/5/12 this month. Columbus Day is 10/8/12 but markets remain open.  A Bradley turn date occurs on 10/9/12 which identifies 10/2/12 thru 10/16/12 as a window for a market trend change.  A Bradley window remains open as the month begins, from 10/1/12 thru 10/5/12, due to the 9/30/12 turn date. Therefore, the overlap of two windows, 10/2 thru 10/5 may make for some dramatic markets this month.  Another Bradley turn date is 11/1/12 so a window will be open during the last few days of this month, 10/25/12 into 11/8/12, thru Halloween on 10/31/12. The new moon is 10/15/12 so military actions which may affect trading would typically occur at the darkest period 10/11 thru 10/17.  The full moon is 10/29/12. Markets are typically bearish into the new moon, 10/12 and 10/15, and typically bullish into the full moon, 10/26 and 10/29. Keystone's Eclipse Indicator targets the period from 10/19/12 on for an increased liklihood of a major market sell off.

A Euro Summit occurs on 10/18/12 where markets will require answers concerning Spain, Greece as well as other headaches. Will Greece remain or exit from the euro? The discussions on a banking union will be key. OpEx week is the week of 10/15/12 so Monday would tend to be buoyant, also the period from a Tuesday low into a Wednesday high (10/16 into 10/17). OpEx Friday is 10/19/12 so markets will tend to move in the opposite direction of Friday come Monday, 10/22. The FOMC Rate Decision is 10/24/12.  The final days of October tend to favor the bulls, 10/29 thru 10/31.