October marks the start of the fourth quarter and the end of the worst six-month time frame in which to own stocks. That implies November and December are usually kind to the bulls. With the S&P 500 up 3.3% so far in October, stocks could be poised to rally into year-end.
Investors may want to consider the odds of a fourth-quarter rally because history says that when September is a strong month for stocks, the good times continue in the final quarter of the year. The S&P was solid last month.
“Historically, strong Septembers lead to strong fourth quarters (up 5.12% on average, vs. 2.04% for all years since 1926), with much of the outperformance occurring in October & November. The S&P 500 rose just under 3% this September,” said Piper Jaffray Managing Director Craig Johnson in a research note.
There are 20 instances since 1926 of the S&P 500 notching positive fourth-quarter performances with a median gain of 5.22% following a September gain of 3% or more, according to Piper Jaffray Technical Research.
At the sector level, financial services and energy have been laggards in the fourth quarter on an unweighted basis since 1969, Piper Jaffray data show. However, that does not mean investors should run out and short the Financial Select Sector SPDR (NYSEArca: XLF) or the iShares U.S. Energy ETF (NYSEArca: IYE). Those sectors traditionally rise in the fourth quarter, just not as much as rival groups. [FAS/FAZ Debate]
As the Piper Jaffray Chart indicates, technology is usually a good Q4 bet and it looks like investors believe that will be the case again this year as the Technology Select Sector SPDR (NYSEArca: XLK) has raked in $436 million in assets since the start of October. [Icahn and Apple ETFs]
The PowerShares Dynamic Media Portfolio (NYSEArca: PBS) could be another fourth-quarter winner given the tendency of media stocks to perform well in the final quarter of the year. PBS has surged over 42% this year, but the idea of media stocks topping the broader market is not new. Over the five years ending September 30, the Dynamic Media Intellidex Index, the underlying index for PBS, is up 20% or double the returns of the S&P 500 over the same time, according to PowerShares data.
PowerShares Dynamic Media Portfolio
ETF Trends editorial team contributed to this post.