October is the most 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.

The following chart plots the percentage performance of the FTSE All Share Index for each October since 1982. For example, last year in 2012 the market rose 0.9% in October. As can be seen, although the market occasionally suffers large falls in this month, for the most part the market posts a positive return. In fact, in the 20 years since 1993 the market has only fallen four times in October – this is a performance only bettered by December. So, October is a volatile month but also in recent years a profitable one for investors.

Six-month effect

One of the strongest – and oddest – anomalies in the stock market is the six-month effect (also known as the Sell in May or Halloween effects). This is where the market over the six-month period November to April greatly out-performs the market over May to October. The difference in performance is so marked that it is debatable whether it is worth even being invested in the market during the summer period. This behaviour, obviously, has not gone unnoticed. Many investors hold off investing in the market until the beginning of the strong six-month period in November. But, investing being a competitive sport, this can encourage investors to anticipate the rise in share prices and get in before the others in November. In other words, this anticipatory buying may be one of the reasons why October has been such a strong month in recent years: as the traditional late-year market rally occurs a bit earlier each 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.

Sectors

In the last couple of decades there have been no sectors that stand-out as consistently strong in the month, but weak sectors include: Construction & Materials, Household Goods and Life Insurance.

Diary

October is a quiet month for company results announcements and the only significant economics dates are the MPC interest rate announcement on 10 October and the FOMC meeting starting 29 October.

Article first appeared in Money Observer