September was supposed to be a train wreck for stock market.  The market had already risen six straight months and the historical tendencies all pointed to weakness.  What happened?  The Russell 3000 a broad measure of the US stock market was up 4.19% and all major asset classes were in positive territory for the month.

At the beginning of month we wrote a post that discussed the statistical significance of historically poor Septembers.  Our bottom line was that the market may very well dip in September, but it wouldn’t be because the calendar turned the page.

In retrospect the hype surrounding the so-called September effect was an example of where contrarianism would have paid off handsomely.  Everyone was looking for a sell-off, but it failed to materialize.  Market Hulbert at Marketwatch writes:

In fact, the month of September will go down in the record books as a textbook example of contrarian analysis at work. Going into the month, advisers were very aware of September’s reputation has the worst month of the calendar — and bet accordingly.

From an interview with investment strategist Liz Ann Sonders by Dan Holland over at Real Clear Markets:

RCM: Plenty of smart investors predicted a major stock market pullback in September. The conventional wisdom was that the market had gained too much ground, and was due for a correction. So far, this pullback has failed to materialize. What’s your take? Should investors be on heightened alert as we head into the fall? Could an October surprise be lurking around the corner?

Sonders: Too many investors fretted about September based on its historical record, and I’ll be the first to admit I wrote a report showing the historical tendencies. But, the greater the number of folks expecting a correction, the less likely it’ll happen … and with so much negative energy attached to September, it’s no surprise to have seen a strong month unfold. Bucking the tide of conventional wisdom is at the heart of contrarian analysis. Now after a strong month, the pessimists are saying we’ve simply pushed the weakness into October and that we’re now REALLY overdue for a pull-back. Look, we probably are, but when the masses are positioned for a sell-off, it means there’s a lot of ammunition for a rally if the market doesn’t “cooperate.”

As we start the month market skeptics like Doug Kass at TheStreet continue to keep the faith looking for a pullbackMark Hulbert at Marketwatch points out that October has been historically the most volatile month for the market.  We found a couple of interesting studies that might argue against a rocky October.

Wayne Whaley writing Trader’s Narrative notes that when the stock market has advanced seven consecutive months (like the market through September) the S&P 500 on average continues higher as opposed to correcting.  In addition, Jason Goepfert at sentimenTrader notes that September performance tends to leak over into the next month:

The numbers here are pretty clear – after good Septembers, the S&P was much milder during October than it was after bad Septembers.  Volatility was greatly reduced when compared to after bad Septembers.  The risk/reward was tilted to the long side after good Septembers, and while it wasn’t a huge edge, the average maximum gain was about 1.6 times greater than the average maximum loss.

As we stand here on October 1st the market is falling and we are in the midst of another pullback in this bull move.  Will October finally be the undoing of the bulls?  In all honesty we have no idea, nor does anyone else.

The fact is that anything can happen in the stock market at any time.  Rogue waves of optimism and pessimism can seemingly rise out of nowhere.  The stock market is going to do what it is going to do in October and it will have nothing to do with what month it reads at the top of the calendar.

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