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Chart Presentation: October

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We are going to do something a bit different today as we burn the first three pages of today's issue with charts focusing on the month of October. Perhaps this is a reasonable way to end the week, month, and quarter.

The argument is that there is a seasonal trend that overlays the markets creating different outcomes from year to year. The trend creates the impression of economic weakness into October/November and strength into April/May.

The seasonal trend works in concert with what we call the 'decade trend'. The decade trend suggests that the markets do similar things in each year of a decade including a cyclical low in the '2' year, a consolidation in the '4' year, crashes and crises in the '7' and '8' years, a cyclical recovery in the '9' year, and a peak in the '0' year. Now... let's push on to the charts.

Below is a chart of the CRB Index from 1982. The cyclical trend bottomed with the commodity markets around the start of October. In 1987 (below right) the stock market 'crashed' in October setting both a high (August) and low (October) only a couple months apart. Below we show the 1990 equity bear market troughing out into October.

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Below is a chart of Japan's Nikkei 225 Index from 1992. The cyclical peak set in the '0' year came from Japanese asset prices. The first significant price bottom for the Nikkei was made during the second half of 1992. Not precisely in the month of October but at least in the general ball park.

The Nikkei 225 Index declined from around 39,000 at the start of 1990 down to below 8,000 in early 2003. The only respite in the bearish trend took place between 1992 and 1997. In 1997 the Hang Seng Index from Hong Kong 'crashed' as the markets worked towards 1998's Asian crisis.

Below is a chart of the S&P 500 Index from 1998. Here were are attempting to show how the SPX made a bottom early into the month of October at the beginning of the end of the Asian crisis. The crisis would eventually drift from Singapore, Thailand, Indonesia, Malaysia, and the Philippines through to Russia and Brazil. Yet... the lows for large cap U.S. stocks were reached in October.

Below is a chart from 2002 of the S&P 500 Index.

We could also have shown the CRB Index making a bottom in October of 2001 in the weeks following the September 11th terrorist attacks but we only have so much space. Instead we have decided to show the way the stock market made at least one of its major bottoms into the first few days of October in 2002.

The point that we are circling has to do with what happens when the seasonal trend hits the decade trend. The seasonal trend argues that economic or cyclical growth will bottom out around the month of October. Perhaps this has something to do with business slowing through the summer and then ramping back up ahead of Christmas although some days we think it relates more to the depressing feeling in the northern hemisphere created by shorter days and colder temperatures.

The decade trend argues that the '2' year tends to go with a major bottom in the cyclical trend so, similar to 1982, 1992, and 2002 this is the time of year and decade when one might expect to see the kind of extreme low in cyclical growth that would be associated in the current case with a generational low for interest rates.

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About the Author

KevinKlombies

Kevin Klombies is a prolific writer and market analyst. After graduating in 1980 from the University of Saskatchewan with a Bachelor of Commerce degree (Honours) in Finance/Economics, he was a broker for about 16 years for Wood Gundy Inc./CIBC Wood Gundy (changed name around 1990) Private Client Division.

While at Wood Gundy, he began to create the intermarket work that would later become the IMRA newsletter. He recalls starting with a DOS version of Metastock that he used to print out charts, drawing lines on them with a pen and ruler and taping them together upside down (at times).

The first market review that he put together was in 1988 and was based on annual percentage changes in U.S. M1 versus the equity markets. It ended up going from desk to desk right to the Bank of Canada, which said there was, in fact, no relationship between money supply growth and the equity markets (“which probably explains why I have so little respect for central banks,†he says).

Klombies says his broker career was uninspiring, mainly because he spent way too many hours running charts and too little time prospecting for business. He found that what he liked best was analyzing the markets and what he liked least was selling, marketing, and client service. So he eventually left the business and continued to work on the analysis while doing some trading and consulting.

He has been featured on a number of web sites, interviewed by Reuters TV in London and marketed by Agora Inc. (Daily Reckoning, etc.), but the majority of what he does is done privately and quietly.

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