Indicator of the Week: The Bright Side to October Volatility Spikes

If history is our guide, volatility could jump in October before ultimately collapsing

Senior Quantitative Analyst
Oct 14, 2015 at 7:30 AM
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Historically, the month of October has brought with it some volatility. The two biggest monthly declines since the Great Depression were October 1987 -- on Black Monday, Oct. 19, 1987, the S&P 500 Index (SPX) fell more than 20% in a single day -- and October 2008. Below, I'll show that we are entering what is possibly a time of cyclic volatility.

Monthly Returns: Below are a couple tables summarizing monthly returns for the S&P 500 over the last 50 and 20 years. As you can see, October has the highest standard deviation of returns over each time frame. The good news is that over the past 20 years, October has been the third strongest month, going by average return, and second strongest according to median return.

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Typical Year-To-Date Returns & Volatility: I thought this was an interesting chart; it shows typical year-to-date data over the past 50 years. Note that the typical return is on the left axis and the historical volatility is on the right axis. Notice also that the volatility spikes way up in October, tops out right around the start of November, and then collapses for the rest of the year. The SPX typical return chops up and down in October, bottoms on Oct. 27 (marked on the chart), and then shoots higher over the last two months.

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The chart below shows the same data as the chart above, except it only shows data over the past 20 years. In other words, this one doesn’t contain the 20% single-day drop in 1987. October again shows a giant spike in market volatility, followed by a collapse in volatility. Again, the index shoots higher over the last part of the year, beginning Oct. 9. It seems that if we can avoid those big outlier moves like in 1987 and 2008, there's a good chance we see smooth sailing and gains over the next couple of months.


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