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The Curse of October

They may be employing the most sophisticated tools of investment. They may be using the latest finance software to fix their stock positions. They may be applying scientific formulas developed by Nobel laureates from Harvard or MIT. They may be trading on the Net, making thousands of dollars by merely clicking on the mouse.

But deep inside, most stock investors guard their money, not with the advanced tools of hedging, but with superstition. It is the month of October that they fear most. They tread the Mondays of October with trepidation. September and November may be business as usual. But they think October is cursed.

October is jinxed because it is linked with the crash of 1929 and 1987. In October you see the maximum number of articles published in newspapers and magazines about the likelihood of a crash. Yet, there is no special reason to believe that Wall Street will crash in October and not in June or March or February.

Read the history of Wall Street: October has not had the most crashes than any other month of the year. Econometrics exercises do not indicate that the probability of a market crash is more in October than in any of the other 11 months. But investors fear October.

The fear of a crash creates a lot of uncertainty in the market. Uncertainty generates volatility, which is what options traders want. In high volatility, options premiums go up. In the past 14 years, there has been on an average more than 20 per cent gain in options premium in October. Volatility traders buy options premium early and sell them during the middle of the month when the premiums may be the maximum.

Stock pundits say that there are other reasons to fear a crash than just the omen of October. The stock market is a big bubble, they say, which may burst anytime. Warren Buffet, one of the most respected investor in the US, has been sitting on a huge pile of cash. Buffet does not think that now is the time to risk on Wall Street. Ignoring Buffet is like inviting trouble. So they all wait for the bubble to burst.

What if the bubble does not burst? What if it slowly gets smaller and then dissolves by itself? Nobody ever thinks of this option, but that appears to have been happening for the past six months. US investors have lost interest in most American stocks, except technology based funds. The happiest people on Wall Street in the past six months have been those who dared to get out of US stocks and have invested in Japan.

According to Lipper a mutual fund tracking organisation, diversified US mutual funds fell 5.37 per cent in the third quarter of 1999. The gain acquired in the earlier part of the year was reduced to half. In fact, the only mutual funds that have grown in the third quarter were technology funds or funds based on Japanese investments.

Even funds powered by once-mighty blue-chip stocks have found the going tough. The average large-cap growth fund fell 3.64 per cent in the past three months, while the average Standard & Poor's 500 Index fund slid by 6.35 per cent. Funds based on technology stocks have grown 7 per cent over the quarter, and are up by 43 per cent over the year. The second big gainers so far this year are funds based on world stocks, up by 16.8 per cent so far.

The average US mutual fund that primarily invested in Japanese stocks rose 22.p per cent in the quarter and is up a whopping 71.2 per cent for the year. Emerging-market debt funds had the best quarter overall, up 2.6 per cent and are the best-performing bond fund sector this year, up 11.1 per cent. Among them the Asian markets, specially South Korean funds, have performed very well whereas the Latin American markets have been down.

According to the textbook on securities trading, crashes and corrections are the best time to enter the market. The trick is to see when the market has touched the bottom. Those who saw the bottom in Japan and in the emerging economies have made profits in the past six months, but those who wanted to climb the dizzying heights of the Dow have not done so well.

Neeraj Kaushal is a financial journalist who lives in New York and is a former senior editor of The Economic Times

Neeraj Kaushal

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