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Pro Analysis

Santoli: Here's why investors should wish for October weakness

Traders work on the floor of the New York Stock Exchange.
Chris Goodney | Bloomberg | Getty Images
Traders work on the floor of the New York Stock Exchange.

Even after last week's choppiness, the stock market has been uncommonly calm so far in the typically unsettled month of October, with the S&P 500 contained within about a 3 percent range.

Yet investors looking for a nice fourth-quarter rally should probably be wishing for some more nervous trading and a deeper pullback in the second half of the month. That's because, in technology terms, October weakness is more a feature of late-year market strength than it is a bug.

The average fourth-quarter return in the past four decades or so has been 3.9 percent. Yet in the past quarter-century, when there has been an October pullback of at least 3 percent and the market wasn't already in a bear market, the average fourth-quarter gain has been 6.9 percent, according to numbers I asked Ryan Detrick of LPL Financial to run.

The two times this October 3-percent-drop-and-then-pop pattern didn't happen since 1990 were in 2000 and 2008, when the S&P was already down more than 10 percent from its recent peak and the U.S. was in a recession. Now, sure, some will point out that 2016 is, like those two bad years, an election year after a two-term presidency. Conditions today don't otherwise seem to fit those years, but that, as they say, is why they play the game on the field and not on paper.

Using a different approach, Mark Hulbert of HulbertRatings.com calculated the returns for the Dow Jones industrial average since 1896 from the low point in each calendar month over the following two months. The average gain from all October lows through the end of December was nearly 7 percent, the best such result of any month.

Of course, one only knows the low point for any month in retrospect. But this analysis does demonstrate the spring-loaded potential of October market declines.