The Ghosts of Octobers Past Wall Street has a superstition problem. “Octoberphobia” is the name traders give to the month’s track record of unnerving declines—the 1907 Bank Panic, 1929’s crash, 1987’s Black Monday, all etched into market lore.
The irony? Despite the ghosts of Octobers past, the market often comes out stronger on the other side.
This year, the fear arrives just as stocks closed out an unusually strong September, leaving investors asking whether the calendar alone can derail a bull run built on AI enthusiasm and a newly dovish Fed.
The irony? Despite the ghosts of Octobers past, the market often comes out stronger on the other side.
This year, the fear arrives just as stocks closed out an unusually strong September, leaving investors asking whether the calendar alone can derail a bull run built on AI enthusiasm and a newly dovish Fed.
September in Review
September defied its reputation as the market’s weakest month. The S&P 500 rose just shy of 3%, the Dow gained 1.5%, and the Nasdaq led with a 5% rally. Nvidia’s rebound late in the month underscored that the AI capex (capital expenditure) story—tens of billions flowing into infrastructure—remains intact. Even small-caps caught a spark after the Fed delivered its first rate cut in nine months, a quarter-point “risk management” move aimed at softening labor conditions.
Not everything was smooth. A wobble in AI stocks mid-month triggered the S&P’s worst weekly showing since August. And while the Fed’s cut provided relief, Chair Jerome Powell’s language suggested restraint: this wasn’t the start of a firehose of liquidity.
Add in tariff shocks and political theater—including a looming government shutdown that threatened to delay key data releases—and markets had plenty to juggle. Still, investors mostly looked through the noise.
Drivers Now
October Outlook
The question is whether “Octoberphobia” bites. History says caution, but context suggests resilience:
Final Word
October’s reputation precedes it, but reputation alone doesn’t move markets. Investors are walking into the month with record highs, a Fed that has shown its hand, and AI spending that still looks like a freight train. Could sentiment wobble if shutdown noise drags on or inflation proves sticky? Certainly. But absent a true shock, the fear of October may once again prove scarier than October itself.
And For What It’s Worth…
A Pennsylvania man has lost his right to take his pet alligator, Jinseioshi, on Walmart shopping trips. The tastefully dressed reptile, certified as an “emotional support animal,” had reportedly been wheeled through stores in a buggy—mouth sticking out—before customers finally complained. Walmart, citing ADA rules (service dogs yes, miniature horses maybe, alligators no), issued a permanent ban.
Investors may recognize the parallel: markets will happily tolerate risk until, suddenly, someone notices there’s a six-foot alligator in the cart.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
September defied its reputation as the market’s weakest month. The S&P 500 rose just shy of 3%, the Dow gained 1.5%, and the Nasdaq led with a 5% rally. Nvidia’s rebound late in the month underscored that the AI capex (capital expenditure) story—tens of billions flowing into infrastructure—remains intact. Even small-caps caught a spark after the Fed delivered its first rate cut in nine months, a quarter-point “risk management” move aimed at softening labor conditions.
Not everything was smooth. A wobble in AI stocks mid-month triggered the S&P’s worst weekly showing since August. And while the Fed’s cut provided relief, Chair Jerome Powell’s language suggested restraint: this wasn’t the start of a firehose of liquidity.
Add in tariff shocks and political theater—including a looming government shutdown that threatened to delay key data releases—and markets had plenty to juggle. Still, investors mostly looked through the noise.
Drivers Now
- Federal Reserve: The September cut was followed by projections for two more this year, though Powell emphasized moderation.
- Economy: Q2 (second quarter) GDP was revised up to 3.8%, consumer spending remains robust, and inflation data show core PCE stuck at 2.9%. A strong economy paired with sticky prices complicates the Fed’s calculus.
- Politics: Shutdown brinkmanship is once again a headline risk. While history says shutdowns rarely dent markets for long, the risk this time is delayed data—particularly jobs and inflation prints—that the Fed depends on.
- AI Momentum: Nvidia and Microsoft announced a massive buildout of AI data centers, keeping the growth narrative alive. Barclays’ Venu Krishna: “Concentration warrants some caution, but with AI gaining momentum as the focal point of global growth, the S&P 500 should be well positioned.”
October Outlook
The question is whether “Octoberphobia” bites. History says caution, but context suggests resilience:
- Seasonality vs. Setup: In post-election years since 1950, October has actually averaged a gain. Jeffrey Hirsch of the Stock Trader’s Almanac notes that when bearish seasonality fails to materialize, “it’s a bullish indication that more powerful forces are at play.”
- Valuations and Risk Appetite: Yes, valuations remain elevated. Bank of America’s Michael Hartnett warns the setup resembles past bubbles, but Deutsche Bank notes renewed momentum in high-risk baskets—signs that risk appetite is rising, not fading.
- Earnings Season: Q3 estimates have ticked higher, unusual for this point in the calendar. Results will test whether corporate profits can support lofty multiples.
- Policy Wildcards: Tariffs, shutdown threats, and Fed guidance at month-end all loom as potential catalysts.
Final Word
October’s reputation precedes it, but reputation alone doesn’t move markets. Investors are walking into the month with record highs, a Fed that has shown its hand, and AI spending that still looks like a freight train. Could sentiment wobble if shutdown noise drags on or inflation proves sticky? Certainly. But absent a true shock, the fear of October may once again prove scarier than October itself.
And For What It’s Worth…
A Pennsylvania man has lost his right to take his pet alligator, Jinseioshi, on Walmart shopping trips. The tastefully dressed reptile, certified as an “emotional support animal,” had reportedly been wheeled through stores in a buggy—mouth sticking out—before customers finally complained. Walmart, citing ADA rules (service dogs yes, miniature horses maybe, alligators no), issued a permanent ban.
Investors may recognize the parallel: markets will happily tolerate risk until, suddenly, someone notices there’s a six-foot alligator in the cart.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
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