The October Effect

here's an interesting article


October is not a good month historically for stocks and the stock market.
Actually, most Octobers are not much different from other months. They stand out because most companies begin their fourth quarter in October.

For retailers and other companies with ties to the holiday shopping season, October is the beginning of the most intense and important shopping season.

However, this article is about three Octobers in particular that live in stock market history.

It can be said that the stock market crashed three times and each of those disasters happened in October.

First Stock Market Crash
The first crash was the beginning of the great market implosion that helped usher in the Great Depression.
On Oct. 29, 1929, the Dow plunged 12.8 percent, which is substantial. However, it didnt stop there.

The market kept dropping and eventually lost approximately 90 percent of its value.

In many ways, the crash of Oct. 19, 1987 was much worse. The Dow lost 22.6 percent of its value in one day.

The slide continued for several weeks adding to the losses, before the market found a bottom that would hold.

Because the markets are much larger now than they were in 1929, the dollar volume lost was much higher.

Stock Market Loses
It is estimated that the stock market lost a $1 trillion in value over the few weeks that followed Oct. 19, 1987.
The stock exchanges have instituted safe guards to help prevent or at least slow down markets in free fall.

When the market registers certain percentage losses during a trading session, the exchanges will halt trading.

Depending on the severity of the losses, the halts may be for an hour or more, or, in extreme cases, for the rest of the day.

The Third Melt Down
October of 2008 joins the infamous list of market melt downs. The problems started months before, but October was the worse month in a string of bad ones.
The S&P 500 was down by more than 27 percent at one point in the month.

It is important to focus on the percentage changes when listening to stock reports. You get a better idea of the magnitude of the change in closing prices with percentages.

Stock Market Percentages
Because of the difference in sizes of the three major indexes (the Dow, the S&P 500 and the Nasdaq), comparing readings is meaningless.
Most investors are glad when October is over, although that may just be an emotional response.

Clearly, these three melt downs inflicted significant damage. However, the 1987 crash provided a unique buying opportunity.

If the markets can absorb a huge retraction and foresee better economic times coming, investors can turn a disaster into a bargain-shopping spree.

Why The Market Could Make A Major Correction In October??

Have you noticed that the stock market has been acting in a polar opposite manor in the 3rd quarter vs. the 1st quarter? The market which felt like it went down everyday and would never rally again during the big slide down from the S&P high of 943 in January to the March 9th low of 667, now the market feels like it goes up everyday and we are in a new bull market. From the July low to the recent S&P high of 1074 the market has been up 65% of the trading days. The market can not continue to rally at its current pace in the face of some serious economic and technical realities. This feeling that the market is going up everyday in conjunction with the bear rally being in its 6th month is enough to take pause and question the size of the rally, and look for reasons this market is due for a major correction in October.

There is a slue of reasons the market could make a major correction in October. Some of these reasons are technical; some are fundamental. Here are a few, all of which are worth careful consideration.

1) The Consumer is hurting

The main driver of the U.S. economy is the consumer, consumer spending accounts for 70% of the nation's GDP. And the consumer is down and out right now.

Americans have lost about 40% of their wealth in the past two years. Unemployment is at 9.6% and will hit 10% in late 2009 early 2010. The real unemployment rate (unemployed, discouraged and part-time workers wanting full-time work) is roughly 16-20%; and weekly work hours are down and wages are stagnant. In short, most consumers have no extra income to spend. And those who do have extra income to spend are increasing their savings rate and are also not spending due to the fear of losing ones job. Not a great set-up for GDP growth.

2) W-Shaped Recession

Without consumer spending picking up to drive the economy upward, the economy is facing a W-shaped recession/recovery, not a V-shaped one which seems to be priced into the stock market..

I feel we are just at or near the apex of the second leg of the "W". The sharp stock market rally is due to rising expectations that the economy has bottomed and is recovering. But the economy is not improving; it is just not declining as fast as it was. This realization will likely hit Wall Street any day now, sending the market back down on the third leg of the "W".

3) Earnings Will Disappoint

The market is extremely overvalued based on current earnings. Historical norms say the S&P 500 should be at 850, not 1,070, that is a 25% premium to historical norms.

And the depressed economy will lead to depressed earnings next year, which means the market will be even more overvalued than it is at current levels. Earnings in the second quarter of 2009 meet expectations (which were lowered) or exceeded in most cases due to a massive cost cutting effort, hence massive layoffs. In a majority of cases earnings were not due to growth. I suspect that 3rd quarter earnings will not meet expectations.

4) Banks

The banks led the market down and led on the way up. The banks still have trillions of dollars in toxic assets, increasing credit losses and are facing new accounting and regulatory rules that are pressuring them to raise capital and dilute shareholders. These toxic assets are still on the books at every bank and need to be accounted for and major losses taken. And increased forecloses because of residential and commercial loan defaults will only increase the banks losses. How long can banks cover up these toxic assets? And the market is not likely to react well as banks start to take losses on these toxic assets.

5) Professional Money Managers and Short Covering
Two keys that drove the market higher the last 6 months are short-sellers covering their positions and money managers putting money back to work and in the later stages it is money managers chasing performance. Opportunities for quick profits are less prevalent at current levels reducing buy-side volume. As the year end approaches more managers are preparing to bank profits, this will put pressure on the stock market to hold gains.


http://www.istockanalyst.com/article/viewarticle/articleid/3501363#

the other months which i heard not good for mkts or say for invstrs r :
> nov, dec, jan, feb, mar, apr, may, jun, jul, aug, & sep !

sudoku thts very true

when september started there was same kind of talks all around saying september is generally the most bearish month as per statistics

i would like to go hunt the bears:annoyed: if anythin like dat happens

To talk based on facts.. as per last 27 yrs of behaviour (from 1982 to 2008),
- % of time Oct was -ive = 57% (month with second highest % of being in -ive). Highest month is March with 64% of time being -ive.
- If someone said the same for Sept then as per history, only 39% of time Sept was a -ive month. These guys were just remembering last September's shock and forgot to look at previous years performance.

Like standard fact of life, -ive days don't last forever.. so we have December, which has been 79% +ive in last 27 yrs (the highest predicatable % number). This followed by June with track record of ending in +ive 71% of the time.

There is reason behind that because all fund managers have to close the accounts and their annual bonus depends on the performance of return that they have generated. Hence it is usual tendency to take market higher.

I wouldn't be surprised, if Oct-09 also follows the same seasonal pattern and ends in -ive.. Lets wait and see.

Just to add to the list of reasons that go against the bulls are

1) None of the recession ended in V recovery. So what makes us believe that this recession will end in V shape.

2) Markets have gone up because lot of cash was pumped in by Govt.. It has to find the place somewhere and it happened to land in Stock market which anyway looked very attractive after the crash of last year.

3) Most of people have ignored or underated the role of Credit Rating agencies in this recession. They are the people who kept giving good rating to all companies and derivaties when they knew/ should have known the real risk.
One of the Ex Moody's analyst is testifying in front of House in US today. He has mentioned that rating agency Moody have been giving inflated ratings to corporates as recent as early this year.
For these agencies, getting the revenue is more important then being 100% right. Whether the practice is right or wrong, no comment. But that is the reality of many professions. People do what they are paid to do. No one will pay to rating agency to get poor rating.

If rating agengies take this as a warning and start getting strict with their ratings, then we might see flow of downgrades going forward. And then we can very well judge markets response to it.

4) Fear index VIX, is at lowest level (Nifty VIX near 24/25). That shows the complecency in market. No one has any fear and everybody knows that market will go north forever.
That is the time we see the surprise. Such low VIX ratings have been pretty good in identifying market tops and reversal is just around the corner.

5) Insider (directors)Trading statistics in US market is indicating that insiders shorts are above 95% level. So if insiders/directors are selling their own stocks, then whom will u follow. Mind it, the same director made +ive statements with last quarterly report and most likely they may make similar +ive statements in October as well with their quarterly reports.
And if they are convinced with their own statement, then why will they be selling their stocks ?

6) Baltic index , benchmark index of shipping industry, which fell from peak of 11000+ to 1000.. did bounced back to 4400 level in recent rally.. But it has again come back to 2400 levels.
So if there is no economic activities picking up in the world, then what makes us think that recovery is in place and we are going north.

Enough of warning signs.. but that is just for the big picture that might be valid for next few months.

But as a trader, we should trade what we see (even if it involves going against big picture depending on our trading timeframe).

So trade what you see.. not what u think
Happy Trading

Seems, finally October is living upto its name.. and last week is showing its color now.

We still have 2 more trading days in this month, but most likely we many not be able to cross the prev month's close of 5084 that means we will close in red in Oct.

Fear index VIX is also rising (US VIX has gone up from the range of 20 to 25 now and NIFTY VIX has gone up from 24 to 28 range).

Happy and safer trading.