Market Extra: October’s performance could decide if stocks have a great, or middling, run deep into 2018

The market’s hardest period of the year, in terms of historical seasonal patterns, is just about over, though investors can be forgiven if they didn’t realize things were supposed to be risky.

The period between the end of April and the end of October is informally considered the “worst six months” for both the Dow Jones Industrial Average DJIA, +0.11%  and the S&P 500 SPX, +0.37% according to the Stock Trader’s Almanac, with the tail end of that stretch seen as particularly risky. (For the Nasdaq COMP, +0.66% the period between the end of June and the end of October is considered the worst four months of the year)

This trend hasn’t played out in 2017. With one trading day left in September, the S&P is on track to rise in each of the past five months, for a total gain of 5.3% over that period. Similar results are seen in the Dow, while the Nasdaq has risen in four of the past five months.

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That rally demonstrates how unceasing the market’s advance has been. For the month of September, the Dow is eyeing a 2% gain, the S&P a 1.6% advance, and the Nasdaq a 0.4% rise, as of Thursday’s close. The Dow and the S&P are on track for their sixth straight monthly gains, while the Nasdaq is set for its third straight positive month, although it has risen in 10 of the past 11 months.

As for the quarter, the Dow was on track for a 4.83% gain as of Thursday’s close, while the S&P 500 is heading for a rise of 3.58%. The Nasdaq is looking at an advance of 5.1%. The S&P and Dow are both looking at their eighth straight positive quarter, while the Nasdaq is on track for its fifth straight quarterly gain.

Wall Street’s September climb is particularly notable from a historical perspective. Typically, it is the worst month of the year for stocks, with an average loss of 1.05% since 1896. (Across the other 11 months, there is an average gain of 0.75%.) Not only have stocks trended higher this year, but the month is on track to be the quietest September, in terms of volatility, in history.

Of course, the “worst six months” period for the Dow and S&P still has one month to go before it enters the more seasonally favorable six-month stretch of November through April. “The market may have successfully navigated the worst two consecutive month stretch of the year, August-September, based upon historical performance, but October still lies ahead,” noted Jeffrey Hirsch, the chief executive officer of Hirsch Holdings, in a post for the Stock Trader’s Almanac.

“If the market can log further gains in October and not succumb to often self-fulfilling prophecy of Octoberphobia and the curse of the seventh year that would be a solid indication for stronger gains over the next best six months and 2018.”

The “curse of the seventh year” refers to how in the previous three decades, Octobers in years ending with seven (1987, 1997, and 2007) have been “trouble,” according to Hirsch’s analysis. The pre-financial crisis bull market ended this month 10 years ago, while the Dow dropped more than 12% over October 1997. Thirty years ago, of course, was October 1987, when “Black Monday” occurred. On that day, the Dow plummeted 22% in a massive crash that still stands as the biggest single-day percentage decline on record.

How the market performs in October could determine what the next year looks like, given there is a divergence between how the market performs in the 12-month period following a “great” May-through-October stretch, and a “not bad” one. Hirsch wrote that with one month in that period remaining for 2017, the S&P was “right on the cusp” of the kind of gains that separate a not bad period from a great one.

In the 12 month period following a great “worst six months,” the market is positive 76.2% of the time, and posts a median gain of 12.8% over that period. For a “not bad” one, it is only positive 62.5% of the time, and sees a median rally of just 4.5%.

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