Trick or treat? How to think beyond the October Effect

The month of October has always had an ominous ring within financial circles. They call it the October Effect. This is the month of crashes, panics, and market meltdowns.

Remember 1929, 1987, and 2008; all these crashes occurred in October. But October isn't just scary for investors and households; it's a month that hits all Australians right in the hip pocket.

Think about it, Halloween isn't cheap. Costumes, sweets, decorations, Aussies now spend hundreds of millions each year on a holiday we barely recognised a decade ago.

October is also when the bills start piling up, energy costs from a long winter are due, and as the warmer weather kicks in, families stretch budgets to cover school holidays. Then Christmas spending begins, and so it is no wonder households are feeling the pressure long before markets start to slide.

And just like trick-or-treaters spooking your doorbell, history shows the market loves to spook investors in October. In 1987, the ASX and Wall Street collapsed in unison on what became known as Black Monday.

In 2008, Lehman's bankruptcy sparked panic in October, sending portfolios crashing. However, those who sold using discipline were able to limit their losses. A simple trendline on the chart would have allowed you to avoid that crash.

But there's a silver lining. October also sets the stage for the so-called Halloween Effect. Markets tend to perform far stronger between November and May than the six months prior, which is why the fear of October creates opportunity.

Retail giants like Woolworths (WOW) and Coles (COL) often see a seasonal sales boost as Christmas shopping ramps up, while consumer discretionary names like Harvey Norman (HVN) are already riding at all-time highs.

REITs tend to rebound into the new year, and the banks (CBA, WBC) are now staring at an even bigger tailwind thanks to the government's 5% deposit scheme for first home buyers. This kicked off on October 1 and is a contentious policy guaranteed to fuel property prices.

October can be brutal in the short term, but it is not always like that, as it often lays the foundation for a robust rebound.

Instead of panicking at the ghosts in the headlines, my advice is to look at the charts and position yourself for the recovery that historically follows. October is the best time to set up your portfolio for the following year.

So yes, October can be scary, but like Halloween, the real fear is mostly in your head. Stay disciplined, stay alert, and October's tricks can turn into November's treats.

What are the best and worst-performing sectors this week? 

The best-performing sectors include Healthcare, up more than 3%, followed by Financials, Industrials and Materials, all up more than 2%.

The worst performing sectors include Energy and Information Technology, down more than 1%, followed by Consumer Staples, just in the red, so far, this week.

The best performing stocks in the ASX top 100 include Ramelius Resources, up more than 10%, followed by Northern Star Resources, up more than 9% and Genesis Minerals, up more than 8%.

The worst-performing stocks include WiseTech Global and Next DC, down 4%, followed by REA Group, down more than 2%.

What's next for the Australian stock market? 

The market is closing higher this week and has posted a solid 1.7% gain as of Thursday's close.

Healthcare led the charge, but it was encouraging to see financials, Industrials and Materials all rising at a similar pace, adding real strength to the move.

The XAO managed to break above the previous week's high to just under 1% away from the all-time high, which is a promising sign.

If September marked the low of this seasonal pullback, then what we've seen so far was just a modest 3.43% dip. This aligns with what we'd expect from the All-Ordinaries Index in a healthy uptrend.

The question now is whether this week's move can sustain itself into next week and beyond. A break above the all-time high at 9322 would confirm momentum.

If the market does gather momentum, we'll be back in full bull market mode. But if price reverses next week to trend lower, we could see a deeper correction, with 8800 and 8600 levels as likely support.

While October tends to be bearish, it is usually not as harsh as September. This year, we escaped the heavy September downturns we've seen in the past, so the hope is that October will follow suit.

Looking further ahead, November and December have historically provided strong market tailwinds. However, if we slip into a broader correction, those rallies may be short countermoves within a larger downtrend.

The key is to watch how the All-Ordinaries Index unfolds next week around current levels. The next rise could be around the corner if it builds momentum.

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