Avoid the ‘October Effect’

Have you heard of the ‘October Effect’?

It’s an old investment myth that leans into the idea that stocks perform worse in October. This is because some of the biggest market crashes in the US have happened during this month.

In mid-October 1907, we had the Bankers’ Panic — an event that led to the ninth-largest decline in US stock market history. Two decades later, on 24 October 1929, we saw a string of large sell-offs kick off the Great Depression. And on 19 October 1987, we, of course, had ‘Black Monday/Tuesday’: one of the first and most damaging global market crashes in market history.

Suffice it to say, October certainly has had its fair share of bad moments in investing history.

That’s why it has become a superstitious month to avoid for many traders.

But like I said at the start, in reality, it is just a myth. In reality, the October Effect showcases the weaknesses of our minds, not markets.

Let me explain…

A volatile month, but not a bad one

The October Effect panders to our brain’s fondness for patterns. We are all hardwired to identify and seek out patterns because that’s what has kept our species alive.

Unfortunately, for modern humanity, patterns don’t always provide the full picture…

When it comes to investing in the month of October, for instance, it is true that it is often a volatile period. According to research into S&P 500 data, there are more 1% or larger swings in October than any other month dating back to 1950.

But just because it is volatile doesn’t mean it is always bad.

In fact, more bear markets have ended in October than started. That means that right now may be a great time to buy, not sell!

Of course, I wouldn’t recommend relying on the past to predict the future. Instead, rather than looking for indicators from years past, all you really need to do is look at what is happening right now.

Because what you might not immediately realise is that there are still gains being made in the market. Despite the inflation and interest rate fixation, certain sectors continue to outperform.

All you really need to succeed in a bear market like this is the right direction…

Spotting the ‘trend breakers’

To give you an example of what I’m talking about, let’s take a look at two sectors from the ASX this year.

Here is the 12-month performance for stocks classified under ‘Information Technology’:

As you can see, it hasn’t been an easy year for these tech stocks. The average return for the past year (blue line) is just shy of a 38% loss. Compared to the S&P 200 (red line), this sector has been a clear underperformer.

Coincidentally, I personally believe that this reaction has presented some great bargain-buying opportunities. But that is a topic for another article at another time…

Instead, let’s contrast tech’s dismal 2022 performance with the hottest investment sector right now, ‘Energy’:

The difference couldn’t be more night and day. Because while tech has languished, energy stocks have thrived. Across the board, these energy stocks have, on average, delivered a 21.42% gain over the past year. And this is during a pretty vicious bear market, may I remind you.

This is why energy really has been the big story all year. Not only has it been shaped by numerous global and local events, but it has also delivered market-beating gains for investors who got in early.

You really can’t afford to ignore this kind of disparity between sectors. The challenge is identifying these opportunities and having the conviction to back them before they break out.

It’s certainly easier said than done, but there are ways to give yourself an edge over others…

One of my colleagues, Callum Newman, has been working on precisely this dilemma. Because despite being a great small-cap stock picker, even he knows it isn’t easy spotting these ‘trend breakers’ ahead of time.

Just like the myth of the October Effect, savvy investors realise that not every stock falls during bear markets. All you need is a little objective help to figure out which stocks will thrive and which will fall to the wayside.

That’s why Cal has co-developed a new system with built-in AI capabilities designed to identify rising stocks and give you a better chance of finding the winners in any market! A bold claim, I know, but trust me when I say you need to see it to believe it.

Fortunately for you, that is exactly what Cal is doing.

At 7:00pm AEDT tonight, he is presenting his system in full to any Aussie investor willing to listen — a presentation that is completely free for anyone willing to sign up. So don’t miss out. Reserve your spot right now by clicking here.

And remember, don’t let October be another missed money-making opportunity ever again.

Regards,

Ryan Clarkson-Ledward,
Editor, Money Morning

Ryan is also co-editor of Exponential Stock Investor, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.