D. Marie Mark Hulbert: The stock market is setting itself up for a possibly monster year-end rally
CHAPEL HILL, N.C. — Good news: The stock market is dropping. The Dow Jones Industrial Average, while ending Thursday well off its early triple-digit decline, fell for the sixth time in nine days to close at its lowest level in 2½ weeks.
Why is that good news?
Because by dropping in October, the stock market creates the preconditions for a significant rally through the end of the year. This year appears to be quite closely following at least the beginnings of that script.
How big a rally? The Dow DJIA, +0.22% over the last 120 years has gained an average of 6.8% from its lowest October close through Dec. 31. On an annualized basis, that’s equivalent to nearly 40%, or four times the stock market’s long-term average.
To be sure, the exact day of October’s low is different every year, and is only known after the fact. It might be, for example, that the low for the current October has already been registered; but it’s also possible that it is yet to come. So it’s unrealistic to assume that investors could have captured the entire amount of the 6.8% average return from October’s low.
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But there still is something unique about October’s low. This became evident when I contrasted the gain from October’s low to the comparable gain for each other month of the calendar. As you can see from the accompanying chart, the gain following October’s low is the largest of all 12 months.
What accounts for this pattern? My hunch is that it’s a disguised form of the better-known “Halloween Indicator” seasonal pattern (also known as “Sell in May and Go Away”). As the chart shows, some of the biggest gains following a monthly low occur during the favorable November-through-April period—and some of the smallest during the unfavorable summer months.
Regardless of what name it goes by, the pattern also is behind another piece of Wall Street folk wisdom: The notion that October is a so-called “bear killer.” Consider the 35 bear markets that appear in the calendar since 1900 that is maintained by Ned Davis Research: No fewer than eight of them ended in October. If bear-market endings occurred randomly, then we would expect fewer than three of the last century’s bear markets to have ended in October.
How big a rally? The Dow over the last 120 years has gained an average of 6.8% from its lowest October close through Dec. 31.
To be sure, in some other circles October is thought of as a “bull killer.” But in fact there is little historical evidence for such a claim. In the Ned Davis Research calendar, for example, just one bull market since 1900 has come to an end in October—barely a third of what you’d expect assuming randomness.
Bear in mind that all these statistics are based on historical averages, and there is no guarantee that current weakness will be followed by a strong year-end rally. Still, it’s worth remembering that October weakness is not, in and of itself, something to be afraid of.
If anything, it should be celebrated.
For more information, including descriptions of the Hulbert Sentiment Indices, go to www.hulbertratings.com or email mark@hulbertratings.com
Published at Sat, 15 Oct 2016 16:41:34 +0000
