The stock market is known for its volatility and unpredictability, but there is one month that seems to have a consistent pattern of positive returns: October. According to a study by Investor’s Business Daily, October is the best month for confirmed rallies in the stock market, meaning that it has the highest probability of starting a new uptrend or extending an existing one.
What is a confirmed rally?
A confirmed rally is a term used by Investor’s Business Daily to describe a situation when the major stock indexes, such as the S&P 500, the Nasdaq Composite and the Dow Jones Industrial Average, rise significantly in a short period of time, indicating a shift in market sentiment from bearish to bullish. A confirmed rally is usually triggered by a follow-through day, which is a day when one of the indexes rises at least 1.25% on higher volume than the previous day.
A confirmed rally does not guarantee that the market will continue to rise, but it signals that the odds are in favor of the bulls. A confirmed rally can also be used as a buy signal for individual stocks that are breaking out of bases or forming new highs.
Why is October the best month for confirmed rallies?
According to Investor’s Business Daily, October has the highest frequency of confirmed rallies among all months, with 23% of all confirmed rallies since 1970 occurring in October. The second-best month is April, with 16%, followed by November, with 15%. The worst month for confirmed rallies is August, with only 4%.
One possible explanation for October’s superior performance is that it follows the historically weak months of September and August, which often create oversold conditions and pessimism in the market. October also coincides with the start of the fourth quarter, which is typically the strongest quarter for corporate earnings and economic growth. Additionally, October may benefit from seasonal factors, such as the Halloween effect, which suggests that stocks tend to perform better from November to April than from May to October.
How to take advantage of October’s confirmed rallies?
Investors who want to capitalize on October’s confirmed rallies should pay close attention to the market action and look for signs of a follow-through day. A follow-through day can occur as early as the fourth day of a rally attempt, or as late as the 25th day. However, the most common time frame is between the fifth and the tenth day.
Once a confirmed rally is in place, investors should look for stocks that are showing strong fundamentals, such as high earnings and sales growth, and technicals, such as high relative strength and volume. Investors should also focus on stocks that are leading their industry groups and sectors, and avoid stocks that are lagging or showing weakness.
Investors should also be aware of the risks and challenges of investing in October, such as the possibility of a false rally, a market correction, or a geopolitical event that could derail the market momentum. Investors should always have a sound exit strategy and use proper risk management techniques, such as setting stop-loss orders and taking partial profits along the way.
October 2023: A promising month for the stock market?
As of October 29, 2023, the stock market is showing signs of a confirmed rally, as the S&P 500, the Nasdaq Composite and the Dow Jones Industrial Average have all risen more than 5% since their lows on October 4, 2023. The rally was sparked by a follow-through day on October 11, 2023, when the Nasdaq Composite surged 2.3% on higher volume.
The rally has been driven by several positive factors, such as the easing of the debt ceiling crisis, the approval of the infrastructure bill, the strong third-quarter earnings season, the rebound of the technology sector, and the optimism about the economic recovery from the pandemic.
Some of the best-performing stocks in October 2023 include Tesla, which soared 25% after reporting record profits and deliveries, Microsoft, which gained 18% after beating earnings expectations and raising its dividend, and Amazon, which jumped 15% after announcing its expansion into the healthcare and pharmacy markets.
However, the rally also faces some headwinds, such as the rising inflation and interest rates, the uncertainty about the Federal Reserve’s tapering plans, the ongoing supply chain disruptions, and the potential resurgence of the Covid-19 variants.
Therefore, investors should remain vigilant and flexible, and monitor the market conditions and the behavior of the leading stocks. October may be the best month for confirmed rallies, but it is not a guarantee of success.