Ides of September and October

10/18/2009 05:12 am ET | Updated May 25, 2011

We all blunder. Take Julius Caesar. In his case, it was big time. Beware of the Ides of March, he was warned back in 44 B.C. As we all know, Caesar pooh-poohed the warning, which cost him his life. As far as the stock market goes, there could be modern ides to worry about--the Ides of September and October.

Since we're in that frightening time frame, be prepared to be bombarded the next couple of weeks by a slew of ominous warnings from market skeptics. They've already started. For example, online investment adviser Mark Leibovit of in Sedona, Ariz., just fired off a note in his daily market commentary about "these two dreaded months" in which he observed "the party continues, but old timers can never forget the September/October massacres."

Raising the question, "a wall of worry or areal danger?," Leibovit noted that September and October are notorious for market crashes. Last year, for example, stock prices fell 24% in October after an 11% drop in September.

Let's put the two months in perspective, which Sam Stovall, Standard & Poor's chief investment strategists, was kind enough to do for me. Actually, as measured by the S&P 500, September, dating back to 1929, has been the worst month of the year, averaging a decline of 1.3%. On average, it's a bummer, declining in six out of every 10 years. During this month, there have been seven instances where the S&P 500 declined 10% or more, versus only five in October.

Interestingly, September--not as widely thought, October--produced the single greatest monthly crash on a percentage basis. That was in September of 1931 during the Great Depression when the S&P 500 dived 29.9%.

Why do investors worry so much about October? Stovall attributes it to the fact that since the end of World War 11, five of the 11 bear markets (as measured by declines of 20% or more) ended in October. One of them was the devastating 21.8% one-day decline on October 19 of 1987, known as Black Monday. That selling blitz occurred because insurance and computer programs all flashed sell signals at the same time. It's noteworthy, though, that October, on average, has produced an 0.2% rise dating back to 1929. Stovall views October as usually a V-shaped month during bear markets--a month in which stock prices fall as bear market selling winds down and then rebound in the initial stages of a new bull market.

So what should investors be thinking about right now? "I wouldn't panic if I was a long-term investor," says Stovall, "because we're in the early phases of a new bull market." While he feels there's a good possibility the S&P 500 could drop, say about 7.5% over the next few months, he notes that target stock prices of S&P analysts suggest the index (now at around 998) could trade at about 1090 12-months out.

If you're unsure of which way to go, Stovall offers five stock ideas--all dividend payers that have increased their payouts and earnings at an above-average pace pace over the past 10 years. The five, all of which pay dividends of 3%, or more, and are rated "buys" by SP analysts, are Chevron, Caterpillar, Johnson & Johnson, Linear Technology and FPL (formerly Florida Power & Light).

Leibovit disagrees. The market look very tired here and ripe for a meaningful pullback, he says. Part of the problem for the bulls now is the lack of a meaningful supply of short shares (a bet stock prices will go lower) that are forced to cover and push stock prices higher. Another is recent weakness in the Chinese market.

If Leibovit, a pretty sharp market timer. is on the money. a word of warning:: Beware of the Ides of September and October!

Write to Dan Dorfman at