Here's how the stock market typically performs in October

Investing.com -- October has a reputation for being one of the most volatile months in the stock market, often referred to as "Octoberphobia." Historical market crashes, including those in 1929, 1987, and significant drops in 2008, have contributed to this label.

In a recent note, The Stock Trader’s Almanac highlights that October has witnessed dramatic market downturns, including the 554-point Dow Jones Industrial Average drop in 1997 and a massive 1,874-point fall in 2008.

But despite these turbulent events, October has also played a key role in reversing bear markets, earning the nickname “bear killer” for turning the tide in 13 post-WWII bear markets.

Over the past two decades (2003-2023), October has been relatively favorable for the market, with the Dow Jones, S&P 500 , and Nasdaq 100 all ranking among the top-performing months, achieving average gains between 0.8% and 1.5%. However, these gains are often accompanied by volatility, particularly in the early days of the month.

The Almanac highlights that October typically starts on a weak note, with markets declining through the seventh or eighth trading day, before finding support and rallying mid-month.

In election years, however, October's performance has been particularly challenging. Since 1950, election-year Octobers have ranked last for the Dow, S&P 500, and NASDAQ.

“Should a meaningful decline materialize in October it may be an excellent buying opportunity, especially for any depressed technology and small-cap shares,” Stock Trader’s Almanac said in a note.

This weakness is compounded by historical trends showing that when incumbents lose, the S&P 500 tends to decline, averaging a 2.2% drop in such scenarios. Even when excluding the dramatic losses of October 2008, the month remains one of the weakest for markets during election years.

The Stock Trader’s Almanac also points to October as a significant month for seasonality.

It marks the end of the “Worst 6 Months” for the Dow and S&P 500, as well as the “Worst 4 Months” for NASDAQ. The month often concludes with a market rally following a pullback, particularly in the week after options expiration.

“Expiration day has a mixed record while the week as a whole has been improving with S&P 500 up fourteen of the last sixteen with an average gain of 1.06%,” Almanac explained.

“After a market pullback/bottom in October, the week after monthly options expiration is most bullish, otherwise it is susceptible to downdrafts.”

Traders are also advised to keep an eye on the Seasonal MACD Buy Signal, which can trigger any time starting in early October.

Source: Investing.com