Will October Bring a 6th Straight Month of Stock Losses?

Last Updated Oct 2, 2011 7:33 PM EDT

Stocks fell for a fifth straight month in September, with the Wilshire 5000 total return losing 7.8 percent. This is on top of a 5.9 percent loss in August, a 2.2 percent loss in July, a 1.7 percent loss in June, and a 1.2% loss in May. In total, stocks have lost 16.6 percent of their value since the end of April, when they were within three percentage points of their 2007 high before the meltdown of financial markets.

Yet despite the "sky is falling" perspective that is currently being represented in the media and elsewhere in the financial world, a streak of five months of losses is not all that uncommon. According to Wilshire Associates, a consecutive five month losing streak last happened as recently as three years ago in the five months ending March 2008. There has even been a streak of seven months of losses that ended in September of 1974.

T. Rowe Price examined stock market streaks since 1926 and produced this chart illustrating monthly market streaks.

Stocks would have to continue falling for another three months in order to set a record, which I sincerely hope I won't be writing about. On the other hand, stocks have increased for as many as 15 consecutive months. Though I can't predict when this will next happen, I'm willing to bet the farm that people will be going into stocks then, just as they are running from stocks today.

What October is likely to bring
According to the T. Rowe Price analysis, stocks have increased 62 percent of the months and only declined 38 percent of the time. Applying this math, there is a 38 percent chance the streak will continue to six months, a 14 percent chance it will go to seven months, and a slightly greater than five percent chance it will set a new record at eight months.

Unfortunately, pure randomness would have predicted that another 10.5 years should have passed after the March 2008 five month losing streak before we saw it again.

T. Rowe Price took a look at the past to see what happened the month after the streak. If history repeats itself, and I wouldn't bet on that, the odds of setting a new record of eight months of losses is low. The problem is that the 100 percent of the time stocks increased after seven months of losses is based on a sample size of one. That shouldn't give you comfort.

My prediction and advice

I am willing to go out on a limb and say the stock market is a better value today than it was five months ago. In fact, it's an 16.6 percent better value.

Whenever there is a streak, gains or losses, the experts tend to predict the trend to continue. My advice is to recognize that the trend is not your friend. Good times don't last forever and neither do bad. This streak will come to an end and there will be a day when investors wished they had a time machine and could go back to buy the stocks they are now selling. Unfortunately, human beings have not proven to be efficient learners. Those that sold in the early 2009 half-off sale are probably repeating the same mistake today.

Author's note: Charts produced by T. Rowe Price.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.