October has historically been a scary month in the stock market, but not this year, and MoneyShow’s Tom Aspray investigates whether November can top October’s strong performance.

The stock market surprised the majority of analysts again in October as the S&P was up 4.4%, the Nasdaq 100 was up 3.8%, and the Russell 2000 gained 2.5%. The Dow Industrials did a bit better than the small caps, for a change, as it was up 2.7% but the Dow Transports led the pack, up close to 6%.

Last summer, several analysts warned investors about the poor historical record for stock prices in September as in the past 60 years, the S&P was down on average 0.8%. The technical picture in early September had improved as many stocks had already reached good support.

At the end of September, many were again concerned about the potential for an “October crash” and the government shutdown caused some to sell in a panic. The dramatic rally from the October lows reinforces that it is better to invest or trade based on hard data not emotion.

So how do stocks normally do in November? Since 1952, the S&P has averaged a gain of 1.40% as it was up 41 years and down just 20. Going back just 20 years, there is not much difference as the S&P was higher in 14 years and lower in seven with an average gain of 1.34%.

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So what does history tell us about November’s performance after there have been nice gains in the preceding two months? The S&P 500 was up 3.0% in September 2013 and 4.5% in October. Since 1992 there have been only five years with similar gains in both September and October.

The best performance was in 1996, when the S&P added an additional 7.3% in November while 2007 was the worst, as the S&P 500 dropped 4.1%. I found that the most interesting charts were from 1998 and 2010.

The chart shows that the 6.2% gain in September 1998 was followed by a sharp drop in early October that took the S&P 500 below the September lows on October 8. The downtrend, line a, was overcome five days later and stocks stayed strong into the end of the year as an additional 5.6% was added in December.

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The decline in 2013 ended on October 9 when the S&P 500 formed a doji. It took six days of strong action before the S&P 500 was able to make new highs in 2013. On this rally, the weekly NYSE Advance/Decline line broke out to the upside, which is a bullish signal for the overall market.

In 2010, stocks bottomed in early September as the A/D line started to lead prices higher early in the month. The rally lasted until November 5 as the S&P 500 dropped 4.5% in just seven days but held the lows late in the month resulting in a small monthly loss. This was followed by a strong December as the S&P gained 6%.

So what do I think will happen in November 2013? The strong monthly finish has caused some of the TV analysts to start talking of a bubble, which from a contrarian standpoint is bullish. There are some signs that the market is losing momentum on a short-term basis but it would take a very ugly weekly close to suggest a sharp decline in November.

If the market does correct 2-3% and then the S&P 500 challenges the 1800 level, it could lead to some pre-Thanksgiving profit-taking and possibly a fractional monthly change. I still think it is best to focus on stocks, not the market, as last December’s signal from the market internals for a double-digit year is still intact.

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Of course, being in stocks that are in the strongest sectors will be the key, and I reviewed some my favorite sectors from a monthly and weekly perspective in the most recent Trading Lesson. Since the stock market’s 2009 lows, there has been a wide disparity in how the index-tracking ETFs have performed.

The Powershares QQQ Trust (QQQ) is clearly the leader, up over 200%, which is over 20% better than the iShares Russell 2000 (IWM), which is up 178%. The small caps have done over 40% better than the large cap Spyder Trust (SPY) but this performance does not include dividends, which would narrow the gap considerably. The SPDR Dow Jones Industrials (DIA) has continued to lag as its price is up just 120% during the bull market.

From a global standpoint, the economies and stock markets of the developed world continue to improve with the German Dax Index making a new all-time high in October. I continue to expect further improvement in the US and Eurozone economies in the coming months. This should also help turn things around in the emerging markets.

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Tickers Mentioned: Tickers: SPY, DIA, QQQ, IWM, IYT