Step outside in October and you’ll be greeted with cooler temps. Pass a coffeehouse and you’ll be met with a fragrant pumpkin-spice aroma.
In the real world, October equates to a welcome seasonal change.
In the stock market, however, election-year Octobers are known for pre-election shocks. This glitch when presidential elections experience out-of-the-blue events leading up to the vote has come to be known as the “October surprise.”
Turns out the term October surprise dates back to the 1800s. But a few recent examples you’ll likely remember include 2012’s destructive Hurricane Sandy, 2016’s Clinton email scandal, and 2020’s COVID-19 outbreak in the White House.
Is 2024 set for an October surprise of its own? Only time will tell.
And while investors may face some hurdles this month, we’ll unpack a powerful trade setup to turn any sudden volatility from an unwelcome burden to a buying opportunity.
Our year-end outlook is bullish, as we were on record last week detailing. Today, we’ll refine that thesis with near-term, evidence-based analysis. That way, instead of fearing an October scare, you’ll be prepared for it.
Preparing for a 2024 October Surprise
The longer we go without a market pullback, the more it starts to feel never-ending. But history shows us that slips and trips come when you least expect them.
Over the past year, we’ve experienced three notable declines – April, August, and early September. So, as you can see below in this chart of the SPDR S&P 500 ETF (SPY), the path to higher highs isn’t a staircase…it’s more like three steps forward, one step back:
All too often, these pullbacks catch us off guard. But they don’t have to if we put our TradeSmith software to work, check out how the S&P 500 tends to perform in October of election years and prepare accordingly.
As you can see by analyzing the last seven election cycles in the TradeSmith Seasonality tool, the large-cap index averages a 3.12% decline in October of election years:
Given that this negative return profile includes the 2008 financial crisis and the dot-com bust of 2000, clearly this data is heavily skewed by those recent market crises.
We aren’t facing anything of the sort in 2024, so let’s not get too carried away with downside rhetoric.
However, we do need to accept the fact that the month of October tends to be weak – then use this understanding to our advantage.
When you examine election-year seasonality, there’s a repeatable pattern that emerge: Stocks dip in the first half of October before firming up in the back half.
And it isn’t just large caps that experience this tendency. The tech-heavy NASDAQ 100 and small-cap Russell 2000 undergo similar action.
From 1988 to 2020 in election-year Octobers, the first 15 days of the month saw the S&P 500 drop 2.83%, NASDAQ 100 fall 2.94%, and the Russell 2000 slide 3.78%, on average.
Don’t frown. This is where the good news starts.
Because beginning Oct. 16 – Oct. 31, these indices showed flat returns.
And then finally, November through December saw solid gains averaging 2.55% in the S&P 500 and a whopping 7.3% for the Russell 2000 small caps:
For me, I’m welcoming an October surprise. If history is any guide, the playbook is simple:
- Expect weakness through Oct. 15.
- Start accumulating beaten-down gems around Oct. 16 and beyond.
- Ride the seasonal rip!
The small-cap surge of 7.3% in the final two months of the year gives this strategy extra thrust. Here’s a higher-octane way to play it.
A Top-Ranked AI Stock for a Red October
Back in May, I discussed how a lesser-known AI stock was booming. AI software requires a lot of data, and with that comes the need for bigger and more efficient data centers. This is where Vertiv Holdings (VRT) comes into play.
Vertiv is in the business of all-in-one data-center needs like power, cooling, and monitoring. The stock isn’t volatility-free, as you would expect. However, VRT has absolutely trounced the S&P 500, climbing nearly 175% over the last year:
And when you take a peek at the revenue and net-income growth, it’s easy to understand why there’s so much excitement.
In 2021, net income stood at $120 million and nearly quadrupled to $460 million in 2023. Then for this year, 2024 estimates have net income doubling again to $987 million:
That’s a powerful uptrend of both revenues and profits.
Now let’s do a spot check on my favorite all-weather greenlight signal, Jason Bodner’s Quantum Score.
A Quantum Score of 70 and above is the greenlight, meaning the technicals and fundamentals Jason assesses are lined up just right to get in now. And VRT is right in the buy zone, with a 74.1 rating:
So, to bring this all together:
An October surprise should be expected. Major markets tend to fall heading up to the election – and having a gameplan is key.
Start getting your buy list ready with all-stars like VRT, specifically for the second half of October.
History shows that smaller caps tend to start climbing especially sharply in November of election years. To find the best prospects, TradeSmith tools like Jason’s Quantum Edge system are arming investors with cutting-edge data to help make sense of repeatable patterns hiding in plain sight.
Maybe this October, the real surprise for your portfolio will be how cheaply you can buy great stocks for a year-end rally.
Regards,
Lucas Downey
Contributing Editor, TradeSmith Daily
Marc Chaikin warned people about NVDA before its 2023 bull run - now he's naming his next pick or the AI tidal wave. Learn more here.
Source: TradeSmith