Fear of ‘October effect’

There are some interesting traditional attributes attached with the market
Fear of ‘October effect’
Representational Pic

Let me begin with a statement of the Reserve Bank of India’s (RBI) Governor Shaktikanta Das which he, some time back, made in an interview with CNBC Awaaz. He said that India’s stock market is not in sync with the real economy which will result in a correction. “There is so much liquidity in the system, in the global economy, that’s why the stock market is very buoyant and it is definitely disconnected with the real economy,” he said.

The statement of the RBI chief definitely sounds caution and a correction in the market is due, but can’t be predicted when. Notably, many market experts too have been warning of possible correction in the near term. Precisely, expert recommendations have continuously been pouring in to remain cautious as the market has run-up almost at lightning speed.

Amid this caution, there are some interesting traditional attributes attached with the market, which comes to mind. And this is the perfect time to have a look at these traditional traits of the market and its players.

Actually, month of October has got a unique significance in the context of stock markets. It may have faded away over a period of time, but there is still a breed of investors who usually observe extreme caution in investment matters in this month. During this month, which they call ‘ghost month’, they don’t get ‘lured’ to the boom in stock markets and remain extraordinarily defensive, particularly when it comes to trading shares and securities.

Basically this segment of investors is superstitious in nature when it comes to financial matters and they continue to bank upon traditional market advisory channels where they get astrology into play to shape their investment decisions in the market. Before deliberating upon the financial astrology, let’s take a look at the ‘ghost month of October’.

Across the world, October is synonymous with stock market crashes. The behaviour of markets in this month is widely referred as ‘October effect’. So, the theory is that stocks tend to decline during the month of October. Investopedia explains that the ‘October effect’ is considered mainly to be a psychological expectation rather than an actual phenomenon. Most statistics go against the theory. Some investors may be nervous during October because the dates of some large historical market crashes occurred during this month.

The stock market crash of 1929 that led to the Great Depression occurred in October and is known as classic example of ‘October effect’. Plunge of 22.6% suffered by the Dow Jones industrial average in 1987 too happened on 19th October and is referred as “Black Monday.” The 2008 financial crisis also went down in October, when the Dow plunged 2,675 points after investors fearing a financial collapse went on a panic-driven stock-selling spree that resulted in* five of the 10 biggest daily point drops in the iconic Dow’s 123-year history.

Of course, market crashes have also taken place in other months, but the ‘October effect’ has dominated the psyche of investors as major market crashes have taken place in October. If we look from behavioural finance aspect, we find that it’s the power of mass psychology which makes markets to move. This means, if enough investors subscribe to the ‘October effect’ and act on their beliefs, stocks will indeed decline in October and the October effect will become a self-fulfilling prophesy.

However, there’s a section that overlook the ‘October effect’ more as a superstition than a well-documented recurring phenomenon within the marketplace. Some major financial events have also taken in other calendar months such as panic of 1837 and a crash that occurred on a Friday in May 1869 (Black Friday).

We are in the middle of this most feared month. What will next fortnight of the month bring this year? Is there anything out that could cause another October crash, a free fall so big that it gets everyone's attention? These are a few questions which may be at the moment probing the minds of investors who are dominated by the fear of ‘ghost October’.

It’s a long-established fact that human beings have always shown keen interest to know their future. This keenness to get a glimpse of their future led to the science of fortune telling. This is how pseudoscientist or voodoo scientist emerged on the scene. Today millions of people - from those about to plunge into matrimony to those seeking political office to those about to launch business projects – seek advice of these professional soothsayers or what we call them fortune tellers.

These voodoo scientists have been making make hey as a huge segment of investors – be it individuals, groups, companies or corporates, bank upon their advice more particularly for investment in stock markets to remain profitable.

What are these traditional attributes of the market?

In investment matters we have two key players who are professionals in predicting future of stocks and the related markets. One is a breed of fundamental analysts who focus on financials, policy decisions, company/sector-wide developments and so on to analyse the future movement of markets. Second type of professionals comprises of pseudoscientists who are popularly called as voodoo scientists. These voodoo scientists evaluate stock price movement on the basis of birth charts and correlations between stock prices and planetary movements, combination of numerology, horoscopes etc.

Here I am reminded of the technical analysis tools known as Gann angles. William Delbert Gann is founder of this technique and is supposed to have used astrology to forecast stock prices as far back as in the 1920s. Gann angles is widely used by traders even today. Today we have a huge network of these astro economists who discuss the impact of star alignments on stock markets and the economy.

What about mixing of both types of advisors?

There is a segment of investors who use tips from both soothsayers and fundamental analysts. They have the art of using a mix of astrology and technical analysis before buying a stock or even in trading shares. An investor using the two contrast sources of analysis, first sees what astrology has to say, then looks at the technical side and decides whether to invest in the stock or not. Many times stories of using mix of these two contrast analytical tools have been covered by the media. What is interesting to note is that an investor has experienced more accuracy in the prediction of voodoo scientists as, according to them, astrologers are generally right about market movements; especially the timing of the fall or rise of market is as accurate as 95 per cent.

What is the right course for retail investors, especially for those who have first time entered into the market?

Investors should seriously take note of the recommendations of the market experts as they have predicted correction in the market. They should not overlook the note of caution sound by none other than the RBI chief. Chances of a sudden dramatic decline of stock prices across a significant cross-section of a market are not new. Since we are in the middle of the October – a ‘ghost month’, apprehensions of a “perfect storm” for investors who bank upon voodoo scientists for investment matters looms large in the market. It is also notable that fundamental analysts too have sounded a caution for investors amid the fast run-up of the market. So, do not make drastic moves one way or the other when you find your investment within the ambit of your risk bearing capacity.

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