Novembers in the Market

Dan Greenhaus is with the Equity Strategy Group of Miller Tabak + Co. He put out this fascinating analysis of what “Novembers” typically hold in store for us after nasty “Octobers”

Dan writes:

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Okay, so we all know October was down a fantastically ugly 16.94%, the steepest decline since 1987 when that October declined 21.76%.  Going back to 1950, there have been 23 years in which October has been down by *any* amount from the prior September for an average decline of 3.15%.  Subsequent to those 23 years, the following November saw an average gain of exactly 1%, while the following two months, at the end of December, saw gains of a much more substantial variety; up 3.54%.  But of course the decline in this past October was outsized in comparison to the average October decline, so let’s narrow this down a bit.  Using only instances in which October saw a decline of 3% or more (eight such instances), the average gain at the end of November was 1.67% while the average gain at the end of December was 3.70%.  To a degree, this is not entirely surprising as one would assume that the steeper decline would lead to a steeper rebound.  But in most of those instances, the decline was relatively modest.  As I said, those 23 declines averaged about 3.15%, a far cry from October 2008.  The only analogous decline was the drop in October in 1987 which led to a subsequent 8.53% drop in November 1987.

As I noted, the depth of the decline we just went through in October has only one parallel in the post 1950 time frame, which is 1987.  So the next logical step is to head back to the 20s and 30s to get a handle on what occurred in that time period.  Unfortunately, the Octobers of that time didn’t fare too much better.  October 1929 was down 19.93%, October 1930 was down 8.88%, October 1932 was down 13.86%, October 1933 was down 7.82% and October 1937 was down 10.25%.  In the first three instances I noted, the subsequent November was actually down an additional 13.37%, 3.31% and 5.89% respectively and November 1937 was down another 10.25%.  Only November 1933 saw a gain, moving higher 10.27%.

The point is that while we would be inclined to think that a drop of the magnitude we just witnessed would, at the very least, produce a dead cat bounce, that assertion is not entirely supported by history