Seasonal Strategies

October 2022 Outlook: Bear-Killer and Bargain Month

We coined the term “bear-killer” for October way back in 1968 in the 1969 Stock Trader’s Almanac, the second edition. The original theory from the 1969 Almanac still holds water.

October has been the big bargain month of the post-World War II era. Its chief asset is its enviable position in the calendar. It falls in front of the most bullish three-month span of the year (November, December and January). At this time, volume picks up considerably and there is a great seasonal demand for stocks.

Driven by the annual surge of investment funds into the market, October has been a turnaround month—a “bear killer” if you will, turning the tide in twelve post-WWII bear markets: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002 and 2011 (S&P 500 declined 19.4%). Seven of these were midterm years. In addition, so many stalled bull markets seem to get moving again during this month.

Amazing how little this has changed in 54 years despite the many systemic changes to the market, technological advances and shifts in collective human behavior and behavioral finance. The negative seasonality in September and volatility in October that creates “Octoberphobia” and turned October into a “bear-killer” comes from fund tax selling, end of Q3 window dressing and portfolio restructuring.

Down YTD Q3

S&P 500 is down -23.6% year-to-date as of the 9/29/2022 close. With one day left in September S&P 500 is on the brink of the 4th worst YTD Q3 performance since 1930. In the table here we show the record of the previous 23 years since WWII (1946) when S&P 500 was down for the year at the end of Q3.

In all 23 years the following Q4 was up 69.6 % of the time for an average gain of 3.1%. Subsequent Q1s were up only 52.2% of the time for an average gain of 2.7%. The following Q2s gained ground 65.2% of the time for an average gain of 2.9% and then next years were up 73.9% of the time for an average gain of 11.9%.

But the record for midterm years down at the end of Q3 is better. Of those nine midterm years highlighted in blue in the table only 1946 into 1947 had no bounce with 1947 closing exactly at the same price as 1946 for S&P. Overall, Q4s were up 88.9% of the time, average gain 7.6%, Q1s up 77.8% of the time, average gain 6.7%, Q2 up 77.8% of the time, average gain 4.6% and next years up 88.9% of the time, average gain 19.2%.

S&P 500 After Down YTD in Q3 since 1946

So, while things look grim out there on Wall Street, economically and globally, odds are we are nearing a bottom and the prospects for Q4 and next year are encouraging, at least historically, seasonally and 4-year cycle-wise. But there is still a lot that needs to go right, and the market likely has further downside left.

We have shared several analog charts to 2022 this year, but the one that stands out to us now after taking out the June lows on DJIA and S&P 500 is the New Democratic President Midterm Year analog. The chart suggests that after a bit of a rebound in mid-October the market will make a lower low at the midterm bear market bottom toward the end of October.

New Dem President Midterm Chart

While we are all anxious for this bear to run its course and for the next Stock Trader’s Almanac Best Months Seasonal MACD Buy Signal, patience and prudence is in order. As September delivered on its historic weakness October promises to present its usual volatility. The Stock Trader’s Almanac MACD Buy Signal has come as early as October 1, though that does not appear likely this year, and as late as mid-December.