Ned Davis Research
The stock market has a tendency to hit its bottom in late October, according to Ned Davis Research.Seasonality data shows that the stock market is about to exit its weakest period of the year.This dynamic could set the stock market up for a year-end rally, according to Ned Davis Research.
Our Chart of the Day is from Ned Davis Research, which highlights the stock market’s seasonality pattern towards the end of the year.
The chart looks at the median percentage change of the Dow Jones Industrial Average every year from 1900 through 2022, encapsulating more than 120 years of market history.
The chart shows that the stock market typically bottoms towards the end of October before staging a strong year-end rally.
That pattern appears to be playing out this year. The median decline from the stock market’s typical July/September high to the end of October is about 8%. The Dow Jones has declined by about 8% since its late July high, lining up with the seasonal pattern.
“During the last week of October, the stock market transitions from the most prolonged period of seasonal weakness to the most bullish two-month window,” Ned Davis Research said in a recent note.
For a year-end rally to trigger, Ned Davis Research said it would like to see more pessimism among investors and further oversold readings in the stock market. Hurting chances for a year-end stock market rally include higher interest rates and poor market breadth, which measures the participation of individual stocks in any given rally.
“In an era of higher rates, breadth thrusts may be more difficult, but a few signals would confirm a year-end rally is underway,” Ned Davis Research said.
The breadth thrust indicator tracks momentum in the stock market. The “thrust” occurs when a high percentage of stocks rally together, and NDR monitors when 90% of stocks climb above the 10-day moving average.