Two possible Buying Opportunities in October, but Favour the Later
ByExamining the percentage change in the VIX over the month of October, it can be seen that there are two peaks, one in the second week of October (approximately October 9th) and the other in the last week of October (approximately October 28th). These two peaks have coincided with buying opportunities in the stock market.
The peak in volatility that occurs approximately in the second week of October, tends to take place in bull markets and typically coincides with a correction in the market. The sector that often starts its seasonally strong period at this time is technology. For an indication of the strength of the market, pay attention to the strength of the technology sector relative to the S&P 500. If the market does have a major correction in the second week of October, investors should consider starting to increase their equity positions (within their risk tolerances).
The second peak in volatility often occurs in the last week of October, coinciding with a large correction in the market and a major buying opportunity. I have often written about the best six months of the year, starting on October 28th (buy into the market at the end of the day on October 27th) and fi nishing on May 5th. These six months have on average produced bigger gains and been positive more often, than the other six months of the year.
Over the long-term, the biggest opportunity in October typically presents itself towards the end of October, as the market is often negative for the month at this point. Entering before the last few days of the month can produce large gains. Many market pundits write about the virtues of investing in the best six months of the year – from November to April, inclusive, but miss out on the gains that can be made by entering the market in the last few days of the October. From 1950 to 2008 the S&P 500 has produced an average gain of 1% in the last four market days of October. Last year these days produced a huge gain of 14%. It would be unrealistic to expect a similar performance, but nevertheless investors should prepare for an opportunity to enter the market at this time.
If the market is once again plummeting in October and volatility skyrocketing, investors should remind themselves that October has historically been the most volatile month of the year. It is always hard to enter the market when volatility is increasing, but investors who have relied upon the seasonal trend of an increasing market at the end of October have been rewarded.
