October often evokes fear on Wall Street as memories are stirred of crashes old and new: 1929, 1987 and 2008. There were back-to-back massacres in 1978 and 1979, a 554-point drop on Oct. 27, 1998 and the 733-point drop on Oct. 15, 2008. During the week ending Oct. 10, 2008, the Dow lost 1,874.19 points (18.2%), the worst weekly decline since 1901 in point and percentage terms. The term “October phobia” has been used to describe the phenomenon. Market calamities can become a self-fulfilling prophecy, so stay on the lookout and don’t get whipsawed if it happens.
But October has become a turnaround month—a “bear killer” if you will. Twelve post-WWII bear markets have ended in October: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002 and 2011 (the S&P 500 declined 19.4%). Eight were midterm bottoms. Current market weakness could be setting up October 2015 to be another “turnaround” month.
Pre-election year Octobers since 1950 rank poorly: #12 for Dow, Nasdaq and Russell 2000; #11 for S&P 500 and Russell 1000. Eliminating the gruesome 1987 from the calculation only provides a moderate amount of relief. However, the last four pre-election year Octobers have enjoyed solid gains across the board. Should a meaningful decline materialize in October, it is likely to be an excellent buying opportunity, especially for depressed technology and small-cap shares.
Options expiration week in October provides plenty of opportunity. On the Monday before expiration, the Dow has only been down seven times since 1980 and the Russell 2000 has been up 20 of the last 25 years — 17 straight from 1990 to 2006. Expiration day has a spotty record as does the week as a whole. After a market bottom in October, the week after is most bullish; otherwise it is susceptible to downdrafts.