Will the Market Suffer through a Red October?

It is at this time of year that we start to hear about the October effect on the market and how it is the scariest month in the calendar year for investors. Currently, the All Ordinaries Index is down just over 6 per cent and with just five trading days left in September, investors are wondering if the Australian stock market will have a meltdown in October. To fuel the fear, stories will be written about the black Tuesday crash in October 1929 and the black Monday crash in October 1987 but is October really a month that investors should fear?

What the statistics reveal about the market in October

Looking at the data over the last 40 years since 1982, October closed down 14 times, which means statistically October is likely to rise 65 per cent of the time. When comparing this to September and November over the last 40 years, each month closed lower on 20 occasions, meaning there is a 50 per cent chance that they would end in positive territory. That said, the market has only risen and fallen across all three months on four occasions but October has had the largest swings in price with the highest being 10 per cent while the biggest fall was 42.45 per cent in October 1987.

Unless we see a significant rise this week, September 2022 is likely to close down and outside of the four times all three months fell together, only five times in the past has October ended the month down after September fell. That means statistically speaking next month has a 77 per cent chance of closing up.

Looking at more recent history since 2000, following a down month in September, October has only closed lower on three occasions one of which was during the GFC while the others occurred in 2000 and more recently in 2018. Given this, there is an 86 per cent probability that October 2022 will close up for the month. While I am not ruling out that October could end in negative territory, the statistics indicate that we do not need to fear October.

What were the best and worst performing sectors last week?

The best performing sectors included Materials down 1.02 per cent followed by Financials down 1.68 per cent and Energy down 2.09 per cent. The worst performing sectors included Information Technology down 6.49 per cent followed by Utilities down 5.38 per cent and Consumer Discretionary down 4.90 per cent.

The best performers in the S&P/ASX top 100 stocks included Whitehaven Coal up 6.60 per cent followed by Pilbara Minerals up 5.66 per cent and Washington H. Soul Pattinson up 5.27 per cent. The worst performing stocks included Block down 16.63 per cent followed by Domino’s Pizza down 12.65 per cent and ARB Corporation down 10.26 per cent

What's next for the Australian stock market? 

The All Ordinaries Index ended last week down 2.79 per cent as it fell to 6,756 points, which is just below the target level I had for the fall at 6,800 points. The events of the past couple of weeks is a reminder that no matter how much analysis we do, the market is always in control and will do what it wants rather than what we might think. This is also a stark reminder for investors not to get hung up on expert opinions, as no one is 100 per cent correct.

While I previously indicated that the market may rise, I also urged investors to be careful, as it was still possible it had not stopped falling, which we now know is the case. This is also why I have continued to recommend investors wait for confirmation before buying.

So, where to from here? If the market is going to rise until the end of the year, it needs to turn soon. There is strong support around the low of 6,581 points from June and if the market turns up without breaking this level, then the next few months will be very bullish. If price falls through that level this week or into next there is even stronger support at 6,192. Either way, I believe the All Ordinaries Index will bottom soon and start to move up over the following month or two. Once again, it is wise to sit tight until we can confirm the direction of the market.

For now, good luck and good trading. 

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.