Research Piece: Ides of September and October

Throughout our career, we have been warned about the “Ides of September/October”, i.e. the chance for a significant decline in those months. Yet, in many cases, the market has rallied in those months, or gone sideways. We have often wondered if there was an indicator that forecast the price movement in October, but have not been able to find a common denominator, in spite of the examination of various indicators. Our latest attempt has some merit, and we present results to you in the following article. 

We asked a very simple question: How often is the market higher in October when % Bears from Investors Intelligence is 30 or greater in the preceding July? And, how many times is the market lower when % Bears is below 30. The answer was interesting, and somewhat inconclusive, but we show some results below. We used data from 1970 to 2009, or 39 years worth of data. The answer was “YES” to both questions (in other words, it would have been correct to buy or sell based on sentiment being above or below 30% bears) 23 out of 39 occurrences (59% of the time). The average gain was 9.2%. On the 16 times the indicator failed, the loss was 7.2%. We also note that in a couple of years, the data failed when there were significant fundamental problems that were widely acknowledged during the year. For example, in 1974 % Bears was a high 59 but the market fell anyway, due to overriding concerns with Watergate and the end of the Vietnam War. In 1990, the Dow double topped in the summer, and then Iraq invaded Kuwait, and down the market went with 35% bears, not a surprise. Sometimes the numbers are not completely exact, i.e. in 2009 we had 29.9% Bears (not 30%!), and up went the market – we count that as a failure, but it may be too precise. 

There were two streaks in the data – from 1982 to 1990 there were eight “hits” in a row, and this would tend to validate the data because the 80’s were strong bull market years, yet 1983, 1985, 1986, 1987 were all signaled as down by % bears in July and were, in fact, down. The indicator may be working less well now – in 2003 – 2005 % bears in July was below 20 and the market went up, and in 2002 – a bad year, there were 34% bears and the market was down 9.2%, probably the worst performance of the indicator. We note this because we are on another streak of three now, and a bad performance (i.e. a drop into October) would equal the longest running negative streak (July 2010 was 34.8% bears).

We have the dataset available to those that have interest.  Please contact us for delivery.