Statistics can tell what ever story you want them to

I have always been a fan of statistics.  You can manipulate statistics to tell what ever story you want.  As a director of a funds management business I have spent many hours sitting back and reflecting on the carnage that happened over the last quarter, trying to work out why stocks were so heavily discounted and for no apparent reason as well as trying to rub my crystal ball to predict what will happen this month (October 2011). 

To look into the future you must first look back into history to see what lessons can be learned and distinguish if any trends are emerging and why.  Markets are supposed to be efficient and random, trends are not supposed to occur and history should never repeat - well that is at least what the finance text books tell us. 

From my experience history has a habit of repeating and markets are not entirely efficient or random.  I choose to use statistics to tell a positive story rather than be all doom and gloom.  Looking back at previous October months the statistics are mixed.  We have had major stock market corrections (crashes) occur in October.  Take for example the events of 1929, 1987 and 2008 – co-incidence maybe?.  The month of October has also proven to signal the end of bear market periods as was shown in 1998, 2001 and 2002. 

The following are some key statistics about the month of October as they pertain to equity markets as found on the Pragmatic Capitalism website (pragcap.com)  This website is one of the best I have found and is certainly full of information and different points of view.  If you have not visited this website I suggest you do.  The data was taken from an article first released on 3 October by Cullen Roche.   

• Known as the jinx month because of crashes in 1929, 1987, the 554-point drop on October 27, 1997, back-to-back massacres in 1978 and 1979, Friday the 13th in 1989, and the meltdown in 2008

• October is a “bear killer” and turned the tide in 11 post-WWII bear markets: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, and 2002

• First October Dow top in 2007, 20-year 1987 crash anniversary –2.6%

• Worst six months of the year ends with October

• Best Dow, S&P, and NASDAQ month from 1993 to 2007

• Pre-presidential election year Octobers since 1951, rank last across the board; excluding 1987 still   near the bottom

• Big October gains five years 1999-2003 after atrocious Septembers

Thus far, many of the seasonal trends have held true in 2011. The traditional “sell in May and go away” strategy adopted by some investors will have paid dividends with the markets off heavily from their May closing. Roche notes that if the seasonal trends continue to hold, October could be the beginning of a change in the bear trend.  He also states that ccording to the Stock Traders Almanac (www.stocktradersalmanac.com), October is a great time to buy stocks as it marks the beginning of the stock market’s strong seasonal period.

We have had an atrocious September so the outlook for October is rosy, well that is at least what I believe the statistics tell us.