TORONTO (Reuters) - Canadian investors defied September's track record as the worst month for stocks, but they may be too scared to lift Toronto stocks much further in the historically treacherous month of October.

The TSX rallied to a two-year high last month, wrapping up its best quarter of the year so far. But strategists and fund managers say a drop of a few percentage points is now a strong possibility.

"If markets are overbought, if we've had a fabulous run, particularly in the US in September, then all of that does suggest a pullback in October," said Patricia Croft, retiring chief economist at RBC Global Asset Management.

Spooky stories about October do not help matters, she said.

October typically ekes out modest gains for equities, but it's also a volatile month, and has been marked by the biggest crashes, including the catastrophic meltdowns of Black Tuesday 1929 and Black Monday 1987.

Most recently, the TSX plunged 17 percent in October 2008 when the global financial crisis was at its peak.

Closing at 12,363.08 on Friday, the Toronto Stock Exchange's S&P/TSX composite index is now well above the median year-end forecast of 12,225 in a recent Reuters stock poll.

But markets face a number of near-term risks. These include more deterioration of economic data out of the US and the chance that third-quarter US and Canadian earnings reported later this month could disappoint.

"The psyche of investors is still fragile," said Garey Aitken, Calgary-based chief investment officer at Bissett Investment Management, a unit of Franklin Resources Inc.

"I don't think there's a lot of conviction on the part of investors that we're setting the stage for big sustained upswing."

Also weighing this month is uncertainty over extending George W Bush-era tax cuts as US midterm elections loom as well as the likelihood of more bad economic news out of Europe.

Stephen Wood, chief market strategist at Russell Investments in New York, noted that while the U.S. Federal Reserve is prepared to embark on a second round of quantitative easing, Europe is still withholding stimulus.

"Where Bernanke is kind of like 'paddles, adrenaline needle to the heart,' Europeans are still talking austerity, sterilization of central bank intervention," he said.

Mr. Wood added that further debt downgrades in the euro zone - of which Spain is the latest casualty - will be less surprising, but could still rattle the market.

There is some weakness from a technical perspective as well. Ron Meisels, technical analyst and president of Phases and Cycles in Montreal, said mid-October presents the next major window for this. The maturing of the 21-day, 70-day and the 39-week cycles could all culminate into a mild pullback, which he said should be taken as a signal to buy.

"There is a lot of money on the side...people will start waking up," he said.