October has a long history of testing investors’ nerves. So far this month, investors have rotated to safety.
October has a long history of testing investors’ nerves. From infamous crashes to sudden reversals, the month has earned a reputation for delivering surprises when confidence is highest. While 2026 hasn't produced a headline-grabbing selloff, the market's underlying behavior suggests something more noteworthy may be happening beneath the surface.
At a glance, the market appears relatively normal, with the S&P 500 down a mere 0.4% this October. However, as has been a common theme, there’s been massive dispersion, with significant gains in some areas offsetting declines in others. Even more notably, the most risk-on areas of the market have sold off while most of its defensive groups have picked up steam, signaling a rotation to safety by the market.
When buyers move away from risk-on areas in favor of other groups, it can often signal rising fear or declining confidence in the broader market. So far this month, technology is down more than 5%, dragging the S&P 500 lower. Meanwhile, consumer staples, often viewed as the most defensive sector, is up a whopping 9.5%. While a single digit gain may sound modest in a vacuum, that puts the sector on track for its 2nd-best calendar-month return of all time, trailing only December 2021.
Over the last month, staples have outperformed the market by more than 10%, something that has occurred only a handful of other times, many of which preceded market declines. Previous “flight-to-safety” events like this occurred during the dot com bubble, the Great Financial Crisis, and the 2022 bear market. In general, market returns have been muted following such instances, with the S&P 500 averaging a return of only 5% one year later. More concerning, those returns were negative most of the time, with the median return coming in at negative 5%.
The good news is that similar defensive rotations over the past few years did not mark the end of the current bull market. In the most recent three instances, the S&P 500 has averaged a six-month return of nearly 20%. So, while investors may want to exercise greater caution given recent action, this signal alone is not an automatic dealbreaker for the bull case.
Additionally, recent action makes much more sense in the context of September. Last month, technology rose 5%, while the other ten major sectors all finished in the red. As a result, technology outperformed the average stock by nearly 10%, as represented by the S&P 500 Equal Weight (SPXEWI). So far this month, technology is leading the way to the downside with a decline of 5%. Conversely, the S&P 500 Equal Weight is up 4%, with eight of the eleven sectors posting gains. In many ways, October has been almost a complete reversal of what investors experienced the prior month
Trend following relies upon the notion that the leaders will continue to lead, but a single month’s worth of action is more likely to be noise than substance. The benefit of relative strength is that it allows investors to focus on the longer-term leadership trends across the market. In the current environment, technology continues to display relative strength, sitting near the top of DALI’s rankings. In contrast, most defensive areas (excluding healthcare), continue to lack relative strength, with consumer staples rounding out the bottom of DALI. Technology did fall from the number-one spot, while energy has climbed back near the top, so there’s have already been adjustments by relative strength. However, with the weight of the evidence still favoring technology and the broader market, particularly over intermediate- and long-term time frames, investors should remain patient until those trends show sustained deterioration.
