Do Markets Break In October?

Happy October 1.  Time for the chain stores to put up Christmas decorations.

The rally in the stock market since the depths of March 2009 has been interesting.  It was oversold back then.  Charlie Munger, the right hand man of Berkshire Hathaway made a tidy sum buying it.

It always pays to take a fresh look at the market. October is certainly a tenuous month. A couple of years ago, Barry Ritholz took a look at the data.  He found that most of the time the market is up in October.

Last year, amidst similar political consternation the market was up a little over 5% in October.  The debt crisis will sort itself out.  Americans are tired of all the posturing.  Obamacare is not ready for prime time, but the Democrats aren’t going to budge on it.

SPW data by YCharts

Two things you can conclude from this.

One, politicians like to create drama since they want to be in the news. They are attention starved toddlers when it comes to the media.  In America, we finally have a three front war in politics.  The socialists in the Democratic party, the big corporatists in the Republican party, and the individual freedom lovers in the Republican party.  Sooner or later some Democrats will join them.

Two, people factor in a lot of bias when it comes to October because of three events since 1926. Oct 19, 1987 was indeed a horrible day.  I was there, and it was pretty shocking.  But, now that day is just data.

The last week of September wasn’t particularly “shiny” for the market.  The market seems like it is taking a breather.  When markets do this, they are either setting up for another big leg up, or it’s the slow leak.  The initial air that comes out of the balloon for the leg down.

^SPX data by YCharts

I don’t think the house of cards the Federal Reserve has built topples yet. I am seeing some signs of froth. But those signs are individual one off observations that are filled with confirmation bias.  They aren’t conclusive data that you should trade on.  We have free money forever and inexplicably the sharp economists in the Fed don’t think free money has an opportunity cost associated with it.

I do know this:  Big breaks in the market start with a trickle.  The dumb money comes in and the pros trade against it to get out.  That hasn’t happened yet as far as I can tell.

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