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On the Lookout for a Red October


With the global economy pushed to the brink, October could contain a disaster of historic proportions.

Going into the last week of September, I think it is important that we take a moment to remember in these volatile economic times that October historically has not been such a great month for the stock market and has seen some significant downturns in the stock market through its history.

We recall that the "Black Monday" of the Wall Street Crash of 1929 that signaled the beginning of the Great Depression was on October 28, 1929. Another important "Black Monday" in the stock market took place on October 19, 1987, the largest one-day percentage decline in recorded stock market history. In 1989, the "Friday the 13th mini-crash" occurred in October. Another mini-crash occurred October 27, 1997, owing to the economic crisis in Asia. In 2002 the stock market downturn found its bottom in the month of October. The month of October was also significant during the stock market crash of 2008.

One might conjecture that we should not be worried about October because 2011 has already experienced its own "Black Monday" on August 8, 2011, following the credit rating downgrade by Standard & Poor's of US debt. However, given the continuing flow of negative news and uncertainty in the markets, perhaps such a conjecture is unwarranted. It is significant to note that of the Dow Jones Industrial Average's (^DJI) top ten largest daily percentage losses, half occurred in the month of October. Of the Dow's top ten largest daily point losses, four occurred in the month of October; seven of the 10 occurred roughly in the fall season.

However, to be fair, the top two largest daily point gains for the Dow occurred in October 2008; five of the top 10 largest daily percentage gains occurred in October as well. Even so, seven of the top 10 largest intraday point swings since 1987 occurred in October 2008.

To say the least, it would appear that historically October has not been a very good month for the stock market. Even if we take into account the historical substantial rebounds in the stock market during the month of October, the month appears to be crucial in particular historical contexts. To be fair, the statistics illuminating October really center around only three years: 1929, 1987, and 2008. Where one can appreciate that historically September has been the worst month for stocks, October appears to reign supreme in terms of market disasters. Whereas September has been volatile this year, one has to wonder if the coming October will bring with it another market disaster.

Why would the month of October be so significant for the stock market? I have not sufficiently studied the subject, I do not explicitly know why, and I am not too certain that anyone else would know precisely why either, but the idea of October being perceived as a bad month for the markets hearkens back to the poetic visualization of a farmer reaping his harvest. The fall season is a time for reaping one's harvest and the fruits of one's labor, and as such a corn farmer's "stock" of corn would appear to go down substantially given the nature of the harvest. In this way, a sell-off on the stock market may be an analogous reaping of labors and funds as in a harvest.

In another light, October could reflect a month of winding down for the year in terms of growth and blossoming in preparation for the winter. While individuals hunker down in preparation for a long, cold winter, volatile stock-trading could reflect a sort of uncertainty going into the winter. Personally, far from October, on an economic level I would expect February to be singled out as a catastrophic month of volatility and crashes in the markets. As opposed to the "Harvest Moon" start of winter, I would expect the "Hunger Moon" end of winter to be the month where everything comes crashing down. With ice-cold weather, shortened food supplies, transportation issues, heightened energy consumption to stave off the cold, stunted commerce after Christmas while individuals are dealing with holiday shopping debt, and less consumer activity following post-Christmas shopping with gift cards and gift certificates, I think early February is a darker time of the year than October. One would think that historically early February would be when stock market crashes would have struck, but no, October takes precedence.

Like a dog posturing back and forth before nature calls, it is as if the markets may be posturing toward taking a substantial dive in the near future. Is there reason to believe that October should not be too bad? In August, Abby Joseph Cohen, senior investment strategist at Goldman Sachs, told CNBC that "September may not be as bad as it has been traditionally because August has already been so volatile." Well, we see how that worked out. I wonder what Cohen's forecast is for October.

Aside from history, if we take a look at the global environment, there are a handful of things suggesting that we will experience a turbulent October. According to the Financial Times, the global economy is being "pushed to the brink" owing to the eurozone crisis. According to the UK chancellor of the exchequer, "The eurozone has six weeks to resolve this political crisis." From the FT article: "Eurozone governments have pledged to pass legislation by mid-October to make their rescue fund, the European financial stability facility, more flexible and are discussing ways to 'maximise its impact in order to address contagion.' " Could this possible legislation spark a historic selloff in the global markets?

Across the pond in the US, the possibility of a government shutdown may also add uncertainty to the markets in October. With FEMA possibly running out of money soon and the US Postal Service not being able to meet its financial obligations, there is reason to believe that this October could indeed be a historic one. Even further, as the unfortunate reality of Obama's jobs plan and Obamacare is setting in, the markets in October may not respond kindly.

Taking these various news pieces in conjunction with turbulent developments in the Middle East and any accompanying impact on oil prices, we could very well be in for a wild October. On the other hand, October could prove to be a relatively quiet month going into the winter and the holiday shopping season. Either way, we might want to fasten our seat belts.


Traders who believe that October will be a quiet month given the volatility in August and September might want to consider the following trades:
  • Go long on SPDR Dow Jones Industrial Average ETF (DIA) and iShares Dow Jones US Index Fund (IYY).
Traders who believe that October will leave markets in the red may consider alternate positions:
  • Short the above.
Editor's Note: This content was originally published on by Marco Rabinowitz.

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