Last trading day of October

Next Monday will be the last trading day (LTD) of October.

Historically, the last trading day of October has been the strongest LTD of any month in the year. Since 1984 the market has on average risen 0.46% on the LTD of October, with positive returns in 69% of all years.

The following chart shows the FTSE 100 Index returns for every October LTD since 1984.

FTSE 100 last trading day of October [1984-2015]

As can be seen on the chart the market only fell twice on the October LTD in the 19 years from 1984 to 2002. One possible reason for this may have been that November is the start of the strong six month period of the year (this is part of the Sell in May effect), and investors could have been buying equities at this time in anticipation of that.

However, in recent years this pattern of behaviour has changed. Quite dramatically so – in the last seven years the market has only risen once on the October LTD. Last year (2015) the FTSE 100 Index was down 0.5% on the last trading day of October.

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The Stock Market in October

October can be a volatile month for equities. Since 1984, seven of the 10 largest one-day falls in the market have occurred in October. The largest fall happening on 20 October 1987 when the FTSE 100 Index fell 12.2%. And since 1970 the average month return for the stock market has been 0.4% ­ ranking October 9th of the 12 months. So, this would appear to bode ill for investors in October.

However, if you look at the accompanying chart you will see why averages don’t tell the whole story and how things have changed in recent years. For example, since 1992 the market has only fallen in five years (and two of those of year were the exceptional years of 2008 and 2009). And since 2000 the average stock market return for month has been 1.7%, making it the second best month for equities after April.

Monthly returns of FTSE All Share Index - October (1984-2015)

The strength of equities in October may not be unconnected with the fact that the strong six-month period of the year starts at the end of October (part of the Sell in May effect) and investors may be anticipating this by increasing their weighting in equities during October. But while October, therefore, should be regarded as a good month for shares, any occasional weakness in the month can be severe.

The average October

In an average month for October the market tends to rise in the first two weeks, then to fall back, before a surge in prices in the last few days of the month (Sell in May effect ­ aka Halloween effect ­ again!)

The month is one of only two months (the other is September) that FTSE 100 stocks tend to out-perform the mid-cap FTSE 250 stocks – since 1986 the FTSE 100 Index has on average out-performed the FTSE 250 Index by 0.7 percentage points in October.

Diary

Dates to watch out for this month are: 7 Oct – US Nonfarm payroll report (anticipated), and 13 Oct – MPC interest rate announcement at 12 noon.

And, finally, for connoisseurs of market anomalies, here’s a good one. An old Wall Street adage goes, “Sell before Rosh Hashanah; buy before Yom Kippur”. This observation was first made for the London market in 1915, and research shows it would still seem to apply in both the UK and US markets. Rosh Hashanah falls on 2 October and Yom Kippur is on 11 October.

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Sell Rosh Hashanah, Buy Yom Kippur

In 1935, the Pennsylvania Mirror referred to a Wall Street adage, “Sell before Rosh Hashanah; buy before Yom Kippur”. Recently an academic paper quoted this article and set out to establish if the adage was true and still valid today.

The theory is that the market is weak during the approximately seven trading-days gap between the Jewish New Year (Rosh Hashanah ) and the Day of Atonement (Yom Kippur). To test this theory the authors studied the results of short-selling the Dow Jones Industrial Average on one of the three days before Rosh Hashanah and buying back on one of the three days following Yom Kippur. They analysed the nine different combinations of trade dates, i.e. selling on the third day before Rosh Hashanah (R-3) and buying back on the day after Yom Kippur (Y+1), R-3 and Y+2, R-3 and Y+3, R-2 and Y+1 etc. The period tested was 1907 to 2008.

The paper found that the mean returns for the DJIA for the nine trade dates considered ranged from -0.47% for R-3 and Y+2 (i.e. shorting three days before Rosh Hashanah and covering two days after Yom Kippur) , to -1.01 for R-2 and Y+1.

In other words, they found that the market had indeed been weak between the two Jewish holidays, and that five of the nine scenarios yielded statistically significant results. They checked to see if this Jewish Holiday Effect might have diminished in recent years and found that the effect over 1998-2008 was actually stronger for six of the nine trade scenarios than for the prior period 1907-1998.

So, what’s the reason for this?

The authors of the paper found that this was not a result of the influence of other anomalies (e.g. the weekend effect), nor was it the result of data outliers. One Wall Street trader gave the traditional explanation that people of the Jewish religion “wished to be free (as much as possible) of the distraction of worldly goods during a period of reflection and self-appraisal.” Of course Jewish traders are only a small part of the market, but at the margin their withdrawal from the market over this period may increase volatility and risk and thus discourage others from trading, and then the arbitrage traders exploiting the effect can make it self-fulfilling.

Is this a peculiarity of just the US market, or is the effect present in other markets?

The above cited paper starts by quoting a 9 September 1915 New York Times article titled “The London Market Quiet – Jewish Holiday Causes Small Attendance on the Exchange”, the newspaper reported that money and discount rates on the London Stock Exchange were “easy today” and attendance at the exchange was low due to the Jewish holiday of Rosh Hashanah.

So, might this effect still be in force in the London market today?

The following chart shows the mean returns for the FTSE 100 Index for the nine combinations of trade dates (as above) for the period 1984-2013.

Average FTSE 100 returns for period between Rosh Hashanah and Yom Kippur [1984-2015]

As can be seen, the market was weak for all nine combinations of trade dates over the Rosh Hashanah to Yom Kippur period. The weakest combination was for selling on the third day before Rosh Hashanah and buying back on the second day after Yom Kippur (T2) when the mean return has been -1.3%.

The Jewish Holiday Effect would therefore seem to be as strong in the London market as that in New York.


The above is an extract from the Harriman Stock Market Almanac 2017.

 

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The Stock Market in October

October is a puzzling of months for investors. On the one hand it has a reputation for volatility – and this is well deserved. Since 1984, seven of the 10 largest one-day falls in the market have occurred in October! The largest fall happening on 20 October 1987 when the FTSE 100 Index fell 12.2%. And, additional bad news for investors: since 1970 the average return in the month has been just 0.3%, ranking it 9th of the 12 months. However, things have changed in recent years.

Monthly returns of FTSE All Share Index - October (1984-2014)

Although the market occasionally suffers large falls in this month (as can be seen in the accompanying chart), for the most part the market posts a positive return. In fact, in the last 23 years the market has only fallen five times in October – this is a performance only bettered by December. In recent years the market has posted an average return of 1.5% in this month (albeit with a very high standard deviation) – ranking it 4th for monthly performance.

But the record of October is less good outside of the UK. An academic paper of 2013 analysed 70 of the 78 operational stock markets around the world and found that October was the third weakest month of the year on average for the 70 markets. Only in Bangladesh was October found to be the strongest month.

The month is one of only two months (the other is September) that FTSE 100 stocks tend to out-perform the mid-cap FTSE 250 stocks – since 1986 the FTSE 100 Index has on average out-performed the FTSE 250 Index by 0.7 percentage points in October.

The average October

In an average month for October the market tends to rise in the first two weeks, then to fall back, before a surge in prices in the last few days of the month – with the last trading day (LTD) being the strongest monthly LTD of the year.

Sell in May

October is important as marking the end of the weak six-month period of the year (which starts with “Sell in May”). So this month investors may be looking to increase their exposure to equities anticipating the coming strong six-month period November-April; which might partly explain the last trading day of October which is the strongest last trading day of a month in the year.

Diary

Dates to watch out for this month are: 2 Oct – US Nonfarm payroll report (anticipated), 8 Oct – MPC interest rate announcement at 12 noon, and 27 Oct – two-day FOMC meeting starts.


Article first appeared in Money Observer

Further articles on the market in October.

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Average market behaviour in November

The following chart plots the average performance of the FTSE 100 Index during November since 1984.

Average month chart - November (2014)As can be seen, historically the market has increased, with a few ups and downs, throughout November, ending the month at the month high.

October 2014

The following chart shows the average performance of the market in October (1984-2013) and overlays the actual performance in October 2014.

Average month chart - October overlay October 2014 (2014)

 

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Last trading day of October

Tomorrow will be the last trading day (LTD) of October.

The LTDs of months used to be stronger than average, but in recent years they have been weak. This is quite different from the first trading days of months which strongly out-perform the average for all days, and where the effect has strengthened in recent years.

Since 1984 the market has on average risen 0.47% on the LTD of October, with positive returns in 70% of all years, which makes it easily the strongest LTD of any month in the year.

However, as can be seen in the chart, the behaviour of the October LTD has changed markedly over time. For the 19 years from 1984 the market only fell twice on the October LTD; but in the 11 years since 2003 the market has only risen significantly on this day in three years.

The following chart shows the FTSE 100 Index returns for every October LTD since 1984.

Last trading day of October (1984-2013) [2014]

 

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Average market behaviour in October

The following chart plots the average performance of the FTSE 100 Index during October since 1984.

Average month chart - October (2014)As can be seen, historically the market has risen the first two weeks of October, then fallen back the following week and a half, but ended strongly over the last few days.


 

September 2014

The following chart shows the average performance of the market in September (1984-2013) and overlays the actual performance in September 2014.

Average month chart - September overlay September 2014 (2014)As can be seen, the market in September 2014 broadly followed the general trend for all Septembers, falling consistently for the first three weeks, but then selling off more than usual in the final week in 2014.

 

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Strong/weak sectors in October

There have been no sectors that have consistently out-performed the market in October.

The following table lists the sectors that have been weak in October.

Sector TIDM
Automobiles & Parts
Construction & Materials
Electricity
Equity Investment Instruments
Food & Drug Retailers
Health Care Equipment & Services
Household Goods
Industrial Transportation
Life Insurance
Pharmaceuticals & Biotechnology

 

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The Stock Market in October

We are in the market’s rock’n’roll period of the year. Stock market volatility is fairly even for the first eight months of the year. In other words, historically, from January to August the size of the daily ups and downs of the market are pretty much the same from month to month. But daily volatility starts increasing in September and peaks in October. Since 1984, average daily volatility has increased 50% in this month.

Monthly returns of FTSE All Share Index - October (1982-2013)Of course, the 1987 stock market crash greatly influences the calculation of October’s volatility and also therefore its bad reputation among investors. However, this is not strictly fair, as October is one of the stronger months of the year for the market. Since 1984 the average return for the market in October has been 0.8% (ranking it fifth of the 12 months), and over the same period the market’s return has been positive in 77% of years (second only to top month December). As can be seen in the accompanying chart, put 1987 to one side and the record looks pretty positive – the market has fallen in October in only four of the past 22 years.

But the record of October is less good outside of the UK. An academic paper of 2013 analysed 70 of the 78 operational stock markets around the world and found that October was the third weakest month of the year on average for the 70 markets. Only in Bangladesh was October found to be the strongest month.

The month is one of only two months (the other is September) that FTSE 100 stocks tend to out-perform the mid-cap FTSE 250 stocks – since 1986 the FTSE 100 Index has on average out-performed the FTSE 250 Index by 0.8 percentage points in October.

October is important as marking the end of the weak six-month period of the year (which starts with “Sell in May”). So this month investors may be looking to increase their exposure to equities anticipating the coming strong six-month period November-April; which might partly explain the last trading day of October which is the strongest last trading day of a month in the year.

In an average month for October the market tends to rise in the first two weeks, then to fall back, before a surge in prices in the last few days of the month.

Diary

Dates to watch for this month are: 3 Oct – US Nonfarm payroll report, 9 Oct – MPC interest rate announcement, 28 Oct – Two-day FOMC meeting starts.


Article first appeared in Money Observer

Further articles on October.

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First trading day of October

Tomorrow will be the first trading day (FTD) of October.

Since 1984, the FTSE 100 Index has risen on average 0.19% on the October FTD. The index has had a positive return on this day in 60% of years since 1984.

The following chart shows the returns for every October FTD since 1984.

First trading day of October (1984-2013) [2014]

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