OMG !! October : The Month of Market Crashes


<image credit:CNNMoney.com>
Do some months have significantly different stock market returns than others? I am not so sure, but many investors belief 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 like 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 recession. The risk should be the underlying business that could not sustain the “shock” or prolong bad economic situation which resulted a "permanent loss " of capital.




Some long term data seems contradict to what we belief, 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 !!




Comments

  1. Thanks for the insights. I did not know about the October effect! Learnt something new today

    ReplyDelete
    Replies
    1. Hi My Investment Machine ,
      Thanks for the comment...Cheers ! :D

      Delete
  2. I'm not a superstitious person, but I do keep a little cash in the pot for October - just in case. Sure, you never know.

    ReplyDelete
    Replies
    1. Hi Singapore Dividend Collector,
      Thanks for visiting my blog , yah !! is good to have some cash in hand ,,nobody know , just in case as what u said :D
      Cheers !!

      Delete
  3. Hi STE,
    I am your regular follower. Enjoy reading your sharing and post.
    Previously, I have asked you about how to manage your emotion when portfolio was down during the financial crisis. And you had shared that it was not easy and you continued to buy more when market goes down.
    But when portfolio was:
    1) $100k , 5% down is $5k paper loss and 10% is $10k paper loss
    After keep adding
    2) $500k, 5% down is $25k paper loss and 10% is $50k paper loss
    Will you start having doubts about your own analysis and keep ruminating yourself why you had bought more at that price level?
    Is it normal to experience such feelings?
    Hope to hear from you more.
    Thank you.

    Warm regards,JB

    ReplyDelete
    Replies
    1. Hi JB,
      Thanks for the comments , yah , I think is normal for ppl to doubt their investing thesis when they saw their portfolio down by 20-30% during crisis , as I said , we will need to understand the market cycles that market always will swing back or rebound eventually , volatility is not the risk , it is the "permanent capital loss " like buying stocks base on tips or hypes , if we are buying good fundamental value stocks , we shouldn't afraid to look at our negative portfolio value , like for example now , my portfolio was down by $-244 K as compare to early 2018 , but I am totally fine and will deploy my war chest if it drop more ..
      I would like to write a blog on recent "market rout" and what I have been done ..selling ? buying or doing nothing ..."akang datang ".. :D
      Cheers !!

      Delete
    2. Hi STE,
      Thank you for your sharing!
      Cheers,
      JB

      Delete

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