Tuesday, April 16, 2024

October’s Trick or Treat for Stock Market Investors: Volatility Brings Both Risk and Reward

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October has a spooky reputation among stock market investors for its turbulent swings and frequent reversals. But within the thrills and chills lies immense opportunity, according to compelling analysis.

Research by trading expert Eric Krull reveals October sees the most “follow-through days” (FTDs), signalling the start of potential mega rallies. However, October’s abundance of FTDs also reflects its propensity for sudden selloffs and market bottoms. Savvy investors can use this volatility to their advantage.

Demystifying the Follow-Through Day

A follow-through day indicates big investors likely support a new market rally, improving its odds of maintaining momentum.

During a correction or bear market, monitor for an initial solid up day on the major indexes like the S&P 500 or Nasdaq — the start of a rally attempt. If indexes quickly undercut recent lows, the attempt has failed.

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But if the rally shows legs over several days, watch for a FTD on day four or beyond. This occurs when an index rises at least 1.2–1.25% on volume exceeding the prior session’s. Volume need not be above average, but stronger price-volume action signals a powerful FTD.

While not all lead to sustained rallies, FTDs mark every market bottom.

Why October Stands Out

Analysis of the historical data reveals October’s uniqueness:

With 35 FTDs, October far exceeds other months. September has the fewest at 19.

37.1% of October FTDs initiated major “money maker” or even “life changing” rallies, the highest rate by far.

In a money maker rally, the Nasdaq gains over 5.5% in the first 20 days post-FTD. A life-changing rally sees at least an 8% Nasdaq surge.

Two Key October Examples

October 1998: In the 1990s bear market, the Nasdaq plunged 33.1% to an October 8 low. The October 14 FTD drove a 20.8% Nasdaq rally over 20 days — a stunning liftoff. This momentum catalyzed the dot-com bubble peak in March 2000.

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October 2022: Last year’s brutal bear market bottomed on October 13 after a 37.8% Nasdaq thrashing. An October 21 FTD commenced a choppy rally attempt that saw new lows before decisively reversing in January 2023.

While October brings frequent turnarounds, its many FTDs also reflect prevalent sharp sell-offs and market bottoms. Patience may be necessary through initial declines before substantial gains accrue.

Rally Attempt Emerging — Will Treats Follow October Tricks?

The major indexes bottomed on September 27, kicking off the ongoing rally attempt. While muted so far, the S&P 500 and Nasdaq could see FTDs as soon as Monday October 3 — day four.

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But this rally could still fail if indexes undercut last week’s lows. October’s abundance of FTDs shows its potential for both stomach-churning selloffs and explosive upswings.

Savvy investors can use these swings to their advantage by watching for FTDs while preparing for short-term volatility. Precise timing is critical to maximize returns from October’s historic reversals.

With October’s track record for trend changes, there are ample precedents for optimism. But be ready to adjust holdings nimbly as early October could deliver many twists and turns.

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Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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