OMG !! October : The Month of Market Crashes

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Do some months have significantly different stock market returns than others? I am not so sure, but many investors believe that October will be the bad month for stock markets and January will be better with higher than average return.

 Is it true that we can time the market base on calendar months like “Sell in May and go away “, buy-in December for Santa Claus Rally “ and  January Effect etc…which sometimes may refer to as “ Calendar Effect”.(link)

October: The Month Of Market Crashes? ( from Investopedia.com)

October is a unique month. In the west, October is a transitional month, autumn sliding relentlessly towards winter. It also boasts the only holiday where people are encouraged to dress up, scare each other and extort candy with threats of mischief. October has a special place in finance, known as the October effect, and is one of the most feared months in the financial calendar. In this article, we'll look at whether there's any merit behind this fear.

The events that have given October a bad name span 80 years. 

They are:

• The Panic of 1907 (October 1907)
  A financial panic threatened to engulf Wall Street, mostly owing to threats of legislative action against trusts and shrinking credit. There were multiple bank runs and heavy panic selling at the stock exchange. All that stood between the U.S. and a serious crash was a J.P. Morgan led consortium that did the work of the Fed before the Fed existed.

• Black Tuesday, Thursday and Monday (October 1929)
  The Crash of 1929 was bloodletting on an unprecedented scale because so many more people were involved in the market. It left several "black" days in the history books, each with their own record-breaking slides. (For more, see The Crash Of 1929 – Could It Happen Again?)

• Black Monday (October 1987)
  Nothing says Monday likes a financial meltdown. In 1987, automatic stop-loss orders and financial contagion gave the market a thorough throttling as a domino effect echoed across the world. The Fed and other central banks intervened and the Dow recovered from the 22% drop quite rapidly.

** We need to understand that volatility does not equal to “Risk”, it is simply a sudden price movement due to certain bad news or events that trigger the huge swing of the stock’s price. The price movement might just be temporary or trigger a longer-term economic effect and lead to a recession. The risk should be the underlying business that could not sustain the “shock” or prolong bad economic situation which resulted in a "permanent loss " of capital.

Never confuse risk and volatility….A Roller Coaster Is Only A Ride (from reuters.com)

Some long term data seems to contradict to what we believe, in fact, if we look at below chart, it seems that September was the worst performance month for DJ, for 100, 50 and 20 years respectively. 

What Is The Best Month To Buy Stocks? ( from startbuyingstocks.com)

Market returns up and down randomly and you will need a crystal ball to tell you which month to buy or sell, I think we shouldn’t buy or sell base on months but on stock’s “fundamental valuation “ instead. If any month’s return is higher than others, I think that’s just by chance and statistically bias. As I repeatedly mentioned, buying during crisis still is the best, regardless of which month to buy.

Cheers !!

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