October vs. November: Unveiling the Best Month for Stock Investment Opportunities

   

Introduction

You’ve probably heard the saying, "Sell in May and Go Away." This means that while returns might be decent until April, the stock market typically declines or moves sideways starting in May, leading to a suggestion to reduce your positions and avoid the market from May. But when should you re-enter? You may have heard of the "Halloween Effect," which refers to the tendency of the stock market to experience greater gains in the six months following Halloween compared to the other half of the year. Since Halloween is on October 31, this essentially suggests buying stocks in early November.

Best and Worst Month to Invest in Stocks

Here is a table that analyzes the monthly stock market performance of seven different indexes.

Source: https://capital.com/stock-market-seasonal-trends-when-is-the-best-and-worst-time-to-invest-in-stocks

This table compiles about 50 years of data (from 1972 to 2022). Although there are many commonalities across the indexes, we will focus on the S&P 500 and Nasdaq. When you look at the summarized data, it’s clear that the stock market sayings that mentioned above aren’t just made up.

• November, December, January: Santa Rally + January Effect
• April: Spring Rally. April brings blossoms not only to nature but also to the stock market.
• July: Summer Rally (1 month)
• September: It’s best to avoid September if possible, which is the worst month of the year. I call this “September Blue.”
• March, May, October: Generally okay.
• February, June, August: Generally weaker.

Probability of Monthly Increases vs. Decreases

If you are a trader, you are likely to believe that investing in stocks is a game of probabilities. Earlier, we looked at the average monthly returns from January to December. Now, the table below shows the historical probability of how often stocks increased each month, without considering the size of the gains or losses.

Source: https://capital.com/stock-market-seasonal-trends-when-is-the-best-and-worst-time-to-invest-in-stocks

For example, the Nasdaq 100 rose 57% of the time in September. However, the average return for that month was -0.5%. This is because, while there were more instances of increases, the average size of the declines was larger than the gains, leading to a negative overall return. By combining both tables, it becomes clear that the best months for investment would be when the probability of an index rising exceeds 50% and the average return is also positive.

Combining Average Return and Probability of Increase

We can consider both the average monthly return and the probability of an increase by compounding these two factors. This approach gives a clearer sense of how favorable a particular month is for stock investing. While the probability of the stock index rising is technically already reflected in the average monthly return, this calculation still offers additional insights.

For instance, the S&P 500 gained 1.0% in January and 0.9% in March on average. This indicates that January was slightly more favorable. However, the probability of an increase was 55% in January and 63% in March, meaning March had more frequent gains. An investor may feel more comfortable investing in March, as the probability of an index appreciation is 8% higher than in January, while the difference in average return is minimal at just 0.1%.

Let's take a look at the calculation results

Edited by Neo; data from capital.com; for 1972 to 2022

Values above 50% are shaded green, those between 50% and 20% are gray, between 20% and 0% are orange, and anything below 0% is marked in red.

To give you an idea, a month with a 50% in the table represents a scenario where the probability of a price increase is exactly 50%, multiplied by the average stock index return of 1.0%, or returns greater than 1% but with a probability lower than 50% or the other way around. Now, let’s see if the earlier summary still holds true.

• November, December, January: Santa Rally + January Effect → Yes
• April: Spring Rally → Yes
• July: Summer Rally → Yes (mostly applies to Nasdaq)
• September: September Blue → Yes
• March, May, October: Generally okay → Yes
• February, June, August: Generally weaker → Yes

October vs. November

Most stock investors know to be cautious in September, typically the worth month of the year and that the market tends to improve starting in November right after Halloween. However, October is often seen as a bit unclear. But as you can see from the data above, both major U.S. indices performed well in October. In particular, the Nasdaq 100 had a 65% probability of rising and an average return of 1.5% over the past 50 years since 1972. With these statistics, do we really need to wait until November instead of buying in October?

Let’s take a look at the list below:

• October 28, 1929: Black Monday. DJIA dropped 12.8%. The beginning of the Great Depression.
• October 29, 1929: Black Tuesday. DJIA fell 11.7%.
• October 19, 1987: Black Monday. DJIA dropped 22.6%, S&P 500 fell 20.5% (the largest single-day drop in history, still a record).
• October 13, 1989: Friday the 13th. DJIA dropped 6.9%.
• October 27, 1997: DJIA fell 7.2% amid the Asian financial crisis.
• October 9, 2008: DJIA dropped 7.3% during the global financial crisis.
• October 15, 2008: DJIA dropped 7.9% during the global financial crisis.

While other months have also seen sharp declines, October has had an unusually high number of significant crashes. So, should we avoid October? Investing in stocks is a game of probabilities.

While past performance and probabilities don’t guarantee future results, one might still consider investing in the stock market, especially Nasdaq 100 in October, which has shown a 65% probability of rising and an average return of 1.5% over the past 50 years—unless a significant market downturn is anticipated. (note that this data starts from 1972, so it doesn't include the Great Depression, but Nasdaq didn’t exist before 1971 anyway). 

Concluding Remarks

According to the adage "Sell in May and Go Away," if you reduced your stock exposure after benefiting from the spring rally through April, when should you increase it again? Some suggest buying at the end of October or early November, around Halloween. This strategy could allow you to take advantage of the Santa Rally in November and December, as well as the January effect.

However, data shows that October also performs well, particularly for the Nasdaq 100, which has historically matched its December performance. Therefore, instead of waiting until November, buying in October could allow an investor to capture the full upswing from October through December, plus January of the following year.

Thanks for reading. I wish you success in making smart investments!

This blog does not offer investment, financial, or advisory services. The information provided herein is for general informational purposes only and should not be interpreted as advice for making specific investment decisions. All investments involve risk, and past performance is not indicative of future results. It is advisable to consult with a qualified financial advisor to determine strategies or products that are appropriate for your individual circumstances. The owner, writer, or operator of this blog accepts no responsibility for any direct or indirect losses that may arise from the use of or reliance on the content presented. The information provided on this blog is subject to change and may not be current. The content is based on personal opinions, as well as information from news sources and research, and may vary due to shifts in personal opinions, financial market conditions, or other influencing factors. Most data referenced is derived from daily closing prices. Data finding, sorting, graphing, and analysis are performed primarily by myself, and while efforts are made to ensure accuracy, errors may be present. If you identify any inaccuracies, please inform me via comments or email, and I will endeavor to review and correct them as necessary. External content or images will be cited to the best of my ability.