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How to beta the stock market in October


How to beta the stock market in October
September 30, 2014 – 9:54am – Lee Wild

October once struck fear into even seasoned investors. It has gained a reputation as one of the most volatile months, and with good reason – think the Wall Street Crash of 1929 and Black Monday in 1987.

But volatility need not be an investor’s enemy. In fact, for those with a healthy attitude to risk, it can be your friend.

Of the 10 largest one-day falls since the FTSE 100 was established in 1984, seven have occurred in October. And, according to City bible The UK Stock Market Almanac, the average return during the month since 1970 is a paltry 0.3 per cent.

That, however, has changed in recent years, and since 1993 the market has only fallen four times in October, making it the second-most reliable month. Its average return is much improved, too – at 0.8 per cent it’s the fourth best performing month of the year.

eventful

October 2013 was certainly eventful. With the US government shutdown, debt ceiling crisis and possible collapse of the Italian government, stock markets were all over the place.

This year will be no less interesting, with the Federal Reserve making its final $15 billion (£9 million) of asset purchases, paving the way for interest rate rises in 2015.

‘Even if markets continue to be positive over the coming months we think volatility is bound to pick up post Fed QE and possibly pre-ECB QE,’ says Deutsche Bank strategist Jim Reid.
How to play October volatility

Savvy investors need not fear risk, but instead make it work for them. To do it involves an understanding of the concept of beta, a measure of volatility, or systematic risk, of either a particular stock or sector versus the market.

A beta of 1 implies that a company’s share price will trade in line with the market. Under 1 and it will move less than the wider market, above 1 and it will be more volatile.

A beta of 2, for example, suggests that if the market rose by 3 per cent, the share price of this company would jump by 6 per cent.

Safety-first investors will naturally be drawn toward low-beta sectors like utilities and non-life insurance.
A selection of FTSE 100 stocks with low betaCompany Code Beta
SSE SSE 0.3
Severn Trent SVT 0.4
United Utilities UU 0.4
Unilever ULVR 0.5
Imperial Tobacco IMT 0.5
Centrica CNA 0.6
RSA Insurance RSA 0.6
Source: Reuters

But to outperform a rising market, traders need high-beta stocks typically found in hot sectors like banking, mining and housebuilding.
A selection of FTSE 100 stocks with high betaCompany Code Beta
Kazakhmys KAZ 2.5
Barclays BARC 1.8
Rio Tinto RIO 1.7
Royal Bank of Scotland RBS 1.7
Ashtead AHT 1.7
Persimmon PSN 1.6
GKN GKN 1.6
Source: Reuters
It’s in the timing

According to the Almanac, the FTSE 100 rises for the first two weeks in an average October, then fall back, before ending the last few days with a flourish (see chart, click to enlarge).

In fact, with investors gearing up for a seasonally strong run-up to Christmas, the last trading day of October is the fifth most fruitful trading day of the year and the most profitable last day of any month.

Playing stock market volatility is not for the faint-hearted, but the chart above, from Almanac, does at least give a clue as to how share prices typically behave during the month.

We’ve identified a few of the events which could cause wild swings in sentiment, but there could be others lurking, both good and bad. Either way, there’s a strategy here for both risk-on (high-beta) and risk-off (low-beta) investors.

This article was written by our sister website Interactive Investor.

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