Welcome to October

October has this weird reputation of being a crash month, and indeed, it has occurred in some memorable Octobers, but statistics show (for what that is worth) that for the last 20 years, October has been up 70% of the time.  The big bugaboo about October is that when it is down, it is usually down more than in most down months.  However, based on nothing but average performance, October starts a 3-month period with the best 3-month performance of the year.
 
...but so what?  September is the weakest month of the year, and we've just finished a good performing September with a new bull market high only two weeks ago.  We NEVER base our investment philosophy on seasonality, since we take a cold hard perspective from historical action under similar conditions.
 
So we start October with our Asset Allocation Model in this condition.
 
 
If you are waking up in a bad mood, you could dwell on the most severely negative historical draw-down for the month of October, but in a typical fashion, we like to dwell on the next 6-12 months as a minimum investment horizon, which tells us that, according to our model's current conditions, we have 3 out of 4 chances of making money in the next 6 months and 9 out of 10 chances of making money in the next 12 months.  The biggest historical loss, when conditions were similar, for the next 12 months is -3.6 %.  Of course, the biggest winner was +34.09%, but let's settle for the median return of 6.17%.  No, that is not great, but it sure beats bond yields, and according to our Bond Momentum Gauge, which we've mentioned in previous weeks, the risk is much worse in holding long-term bonds for the next 6-12 months.
 
So today, the bottom line is, as it has been for many weeks now, use a little short-term caution, but the potential of stocks in this very under-valued stock market is great as soon as investors return to the market.
 
Don Hays
 
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