What is it about October that brings out the fear in traders? It seems to happen with regularity for there to be no connection at all; but on the other hand, each of the major October stock market surprises has had its own unique circumstances.

Part of it presumably has to do with the fact that professional investors think in terms of calendar year performance. If some cataclysmic economic or geopolitical event occurs that could change the outlook of the market, portfolio managers are systematically hard-pressed to make dramatic decisions versus say, March or April, where they have more time to ride out a potential price storm. “Sell first and ask questions later” is often the first psychological response when it comes to dealing head on with the vagaries of October.

For the better part of this year, the market has put in a pretty steady performance—up over 13%–without breaking its intermediate- and long-term technical trends as measured by the 100- and 200-day moving averages. Nevertheless, there have been plenty of memorably ghoulish Octobers in market history. Below you will find an abridged anthology.

The Panic of 1907
In October 1907, speculators attempted to corner the market in the stock of a well-known copper company. The scheme backfired and the banks that had provided funding to the speculators – most notably the giant Knickerbocker Trust Company of New York – suffered debilitating runs.

The market went into free fall, with the New York Stock Exchange falling over 50% from its previous high mark. The ensuing panic threatened to bring the financial system to a standstill until J.P. Morgan – the man himself, not the institution – stepped in with his own capital to provide stability and oversee an orderly unwinding of the failed banks.

The Panic of ’07 spurred policymakers to try and create more institutional stability to mitigate the extreme boom-and-bust environment of the time.

The Great Crash of 1929
October 24 fell on a Thursday in 1929. Stocks had been on a fervid bull run for most of the second half of the 1920s, reaching a peak in September of 1929. But selling pressure had been building for several weeks by the time massive sell orders hit the floor on the 24th. Stop-gap measures implemented by the New York Stock Exchange held the panic at bay for a few days, but all hell broke loose the following week, with the Dow Jones Industrial Average losing over 23% on the first two days of the week—Black Monday, October 28, and Black Tuesday, October 29. By 1932, the Dow Jones Industrial Average would lose over 80% of its value from the September 1929 high, which it would not regain until a decade after the Second World War.

Black Monday 1987
The market meltdown that happened in 1987, on Monday, October 19th, was the largest single-day loss in U.S. market history—over 20% on all major market indexes. But in hindsight it turned out to be far less damaging than the Great Crash of ’29.

The magnitude of the 1987 crash was driven by technology—specifically the automated trading systems that unleashed massive sell orders without human intermediation. The power of this technology took the market by surprise, and policymakers launched a series of efforts to install “circuit breakers”—mechanisms designed to essentially shut down the markets if a tsunami of sell orders were to threaten another cataclysm.

The Financial Collapse of 2008
Although it was still September when the defining event of the 2008 collapse took place—the bankruptcy of old-line investment banking firms Lehman Brothers and Bear Stearns. The markets saved their worst mayhem for, naturally, another October stock market surprise.

The intensity of the October surprise was related to fears about American International Group (AIG), the insurance company whose failure threatened to unravel trillions of dollars-worth of so-called credit default swaps and collateralized debt obligations, with nearly every major Wall Street financial house staring into the abyss. Regulators and politicians, led by Treasury Secretary Henry Paulson, swiftly cobbled together an unappetizing but necessary bailout to save the system—the aftereffects of which continue to impact these institutions and the markets in general.

October stock market surprises come in many different guises.
As October 2013 approaches there are not too many warning bells indicating another fright is in store as the current tone is generally upbeat. But volatility is elevated due to a potential arms conflict with Syria, as well as the uncertainty surrounding the Fed Reserve’s protracted bond-buying program which the Treasury market has already signaled is heading towards tapering.
Notwithstanding, it is always a good idea to stay alert and be prepared, so here is a brief set of technical clues to consider as you build your own survival guide:

1)Watch for the potential violation of key trend indicators on a sustained time basis–add the 100- and 200-day Simple Moving Averages

2)Look for extraordinary volume on the downside days—apply the Volume Average study which defaults to 50 periods

3)Track the market breadth to see if the number of declining issues persistently outnumbers the number of advancing issues—access the pre-fabricated public list on the platform called “Internals,” or the pre-fabricated public scans called “New Yearly Highs” and “New Yearly Lows” and compare them to see which is outpacing

4)Measure the market’s underlying strength against the price action of the bellwether indexes such as the S&P 500 or NASDAQ 100—add the RSI Wilder study and detect whether there is a divergence, meaning the broader market averages struggle to move higher while the RSI Wilder trends lower—that is a bearish leading indicator

–Jeffrey Bierman

The information contained in this article is not intended to be investment advice and is for illustrative purposes only.