How to invest in the historically volatile month of October: Analyst

Callie Cox, Ally Invest Senior Investment Strategist joins Yahoo Finance’s Jared Blikre on today’s Getting Technical.

Video Transcript

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ZACK GUZMAN: Welcome back to “Yahoo Finance Live.” During the month of September, which has been historically rough for markets, investors were counting down the days till October, which generally can spark a trend in a different direction. And today at least proving to be true, on day one, still a little bit more time to go here in today’s session. But for a look at opportunities in October, we’re very happy bring I’m Yahoo Finance’s Jared Blikre for our Getting Technical segment today. And he has a special guest alongside. Jared?

JARED BLIKRE: That’s right. We have Callie Cox here. She is a senior investment strategist at Ally Invest. Callie, welcome back here, friend of the program.

So you just heard Zack’s intro there, coming out of September, the worst month of the year, heading into October, when we tend to get some big volatility spikes. But I was looking at some research by one of your fellow colleagues, Ryan Detrick. And he says that over the last 20 years, October is actually the fourth-best performing month in the year. So we get some big spikes, potentially, in the VIX and maybe some big selloffs historically. But over the last 20 years, not too bad. What is your work telling you?

CALLIE COX: Yeah. So October is a tricky month, right? Ryan is right. It is one of the better-performing months of the year, but it’s not easy gains by any means. October, by many measures, is one of the most volatile months. I believe the average swings about 0.8% per day since 1950. So it’s not an easy month by any means.

I mean, November and December, that’s when you see some of the seasonal gains start kicking in typically. But October seems to be the rough month that everybody has to kind of stomach their way through before we hit that Santa Claus time.

JARED BLIKRE: Well, I want to talk to you about the state of the market right now. We’re experiencing the first 5% correction in the S&P 500 of the year. And I want to go to the YFi interactive because I know you retweeted something earlier today by Urban Campbell. And here’s what he’s saying.

Here are the longest streaks without a 5% correction in the past 50 years. All went onto lose at least 8%. None developed directly into more than a normal correction, which means they were capped at about 10%-12%. And then the next cyclical high in the S&P was at least two months later and as long as 12 months later.

And he has a couple of charts here, probably too small to see. But these go back to the early ’90s. And we can see a few instances here where we had some corrections. I’m just wondering, how does an investor play this now, Callie?

CALLIE COX: Yeah, that’s a really good question. So I thought that tweet was super-super interesting. It’s from our friends at Ned Davis Research, all of that data. So it turns out whenever the stock market breaks the kind of calm that it’s been in, the 11-month stretch without a 5% pullback, generally the pullback that we fall into is a little deeper but not a deal breaker. It’s not exactly a market meltdown. It’s more of a correction to the mean, if you will.

So taking all that into consideration and the fact that we’re staring down so many headlines right now, there’s still a lot of fear in the market. I mean, I can feel it. It’s palpable. So considering we’re in a fearful market, we got that 5 5% pullback, everybody’s expecting more market downside, it’s a really interesting dynamic because fear can actually be really, really healthy.

If the market is expecting the worst, it’s really hard to disappoint that. So as investors look into this market, a typically shaky October, and a market that seems to be moving to the downside, it might be worth looking at some opportunity in terms of defensives. Maybe hedge up a little bit, even though the hedges look expensive.

We’ve been telling our clients to just really position yourself for any scenario because as we know, I mean, this market could also turn around and rally as strongly as it did at the beginning of the year.

JARED BLIKRE: Yeah, sometimes the pain trade is straight up or at least maybe angled up on that wall of worry. I want to talk to you about the sector action now. You mentioned maybe playing some defense here.

We have on the YFi Interactive the SPDR sector ETFs over the last month. And the only one in the green here is energy. That’s up 12%. The worst-performing one’s, interest rate-sensitive sectors, real estate, and utilities.

I’m just wondering, because we talked a few months ago towards the beginning of the summer. And you were urging some defense, maybe some move into utilities or staples. What’s your view now that we’re firmly in the fourth quarter of the year?

CALLIE COX: Yeah, so I will say, the saving grace of October is that earnings season is about to start again. And that’s something that investors can latch on, especially if they’re looking at those sector-specific opportunities.

For earnings season, we are feeling really encouraged by the sectors that could operate well in a high-cost environment, thinking like financials, industrials, materials, those with a lot of pricing power that are economically exposed.

Outside of that, we still really like defensives. That trade does get a little tricky with the right environment. If rates move up, then utilities or other high-dividend stocks don’t look as interesting. But if you’re looking for something, if you’re one of those investors who can’t handle some swings and a market that could run into some swings over the next few weeks, then defensives, while they might not pay out as much as bond yields, they could be a good source of stability.

And in any portfolio, I mean, we always tell our clients stay diversified. Get a piece of everything.

JARED BLIKRE: Well, I want to turn our attention to the rates market. I’m going to pull up on the YFi interact of the 10-year T note yield. Been very volatile lately. We had this big run-up through resistance here. But now we’ve backed off a bit. How does the bond market, especially US Treasury market, factor into your analysis here?

CALLIE COX: Yeah. So rates have been the center of attention. And it feels like it’s been that way all year. I mean, like you said, Jared, the 10-year moved up above 1.5% earlier this week. And that must be some kind of technical level. I’m not a technician when it comes to rates. But it seems to be the level that the market is trying to find its way around.

So when we look at that, rates are still historically low. I mean, that favors growth stocks in theory. But rates are moving up super-quickly. And there is a lot of worry around rates. And it’s not so much the level of rates to us, it’s more of like the move in rates that we’re seeing that could scare the market and could send people back into value stocks.

So right now when we look at it, we say, OK, bond yields are low relative to historical measures. So that could support where the market is right now. Could support stocks moving forward. But at the same time, rates are something to watch, especially because markets are getting nervous about the Fed and the fact that they might taper before the end of the year. And they’re looking to the rates market for some indication of that.

JARED BLIKRE: Well, I’m glad we got a few comments in on the Fed. Callie Cox, senior investment strategist at Ally Invest, thanks for joining us once again. And Zack, turning it over back to you.

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