Binary bet of the week: October taking a turn for the worst…for a change

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3 mins. to read

by Dave Evans of binary.com

October has historically been a strong month for stock markets, especially the benchmark S&P 500. It marks the start of the so called Halloween indicator, which states that stock markets perform better between October and April. Statistically this has been true, with some of the best months for the S&P 500 taking place within this time period.

S&P 500 Monthly Chart

October itself is historically positive, with an average gain of 0.79% going back to 1950, which is about average for the market. One thing that does stand out for October though is its volatility. Measuring monthly volatility as the difference between the month’s high and the month’s low, October is actually the most volatile of all the months. The average volatility is 8.9%, with 17 periods when the monthly range topped 10%, far more than any other period.

So while we might see more upside from here given the positive seasonality, we might also expect further volatility, which means the potential for more downside (at least short term downside).

Looking at another market valuation metric, its downside that we might be more likely to see.

Buffet’s favourite indicator

Legendary investor Warren Buffet’s favourite indicator is a comparison of market capitalisation to GDP. Buffet previously noted that it is “probably the best single measure of where valuations stand at any given moment”.

GDP to market capitalisation ratio


Chart courtesy of http://www.advisorperspectives.com/

We can see that as we head into 2015, US stock markets (as measured by the broad Wilshine 500) are expensive by historical standards. The current ratio is over 100, which is nearly two standard deviations above average.

While this is some way off the peak of the dot com bubble, it is not far off. It also implies that the post 2000 collapse and 2008 crisis only dipped the markets toe back to fair value level, before roaring back higher again.

September and October have since taken some of the worst off the froth from the chart above, but there are still plenty of fears stalking markets right now.

You can take your pick as to the catalyst for this week’s sell off, with many items to choose from. ISIS, Ebola and a slowing Eurozone are all factors in the change of mood since mid-September. Ultimately, markets were running hot going into September and the current sell-off is a return to fairer value. Quite how far markets will fall is unclear right now.

S&P 500 daily chart


You can take your pick as to the catalyst for this week’s sell off, with many items to choose from. ISIS, Ebola and a slowing Eurozone are all factors in the change of mood since mid-September. Ultimately, markets were running hot going into September and the current sell-off is a return to fairer value. Quite how far markets will fall is unclear, but given October’s bias towards volatility, we could see more downside before markets recover.

A good way to play this is ONE TOUCH trade predicting that the S&P 500 will touch 1950 at some point in the next 21 days for a potential return of 251%. Or put another way, betting that the S&P 500 will touch 1950 before the 31st of October could return £35.32 from a £10 stake.

Disclaimer: This financial market report is intended for educational and information purposes only. It should not be construed as investment or financial advice and you should not rely on any of its content to make or refrain from making any investment decisions. Binary.com accepts no liability whatsoever for any losses incurred by users in their trading. Fixed odds trading may incur losses as well as gains.

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