Can You Get Rich With These 7 Stock Market Oddball Indicators?

This is part of our series on “scary money tips and stories”.

Last Friday received its own label — “Gray Friday” — thanks to the spin-happy media, which pointed out that the Dow tanking 2.6 percent came on the very same day 20 years ago when it plunged 22.6% on a fateful day remembered as Wall Street’s “Black Monday”.

You wouldn’t be remiss to expect this plunge on such a stock market anniversary, given that the market often shows some predictability and succumbs to forces that have been around since time immemorial, whether it be structural, economic, political, psychological or even based on superstition. Evidently, this is why we have various stock market and investment schools of thought that are built on recognizing patterns, chart reading and following history.

But how much does coincidence really play a part in these market dips? Whether you believe it or not, such activity has resulted in the emergence of curious stock market superstitions. Silly as it may sound, I’ve even gone a step further and wondered: Could you actually get rich anticipating how markets behave in response to these forces? You may be surprised to hear my opinion.

Stock Market Superstitions, Patterns and Cycles

#1 The October Effect

Seems like a lot of bad stuff happens in October, making it a notorious month for investing. It also looks like this has been the case all the way back in time. When I first started investing in 1990, Black Monday was still a fresh episode in the minds of people. Take note of these examples of wild October stock market behavior:

• In late October of 1929, the stock market crashed for the first time ever with the US markets suffering a serious 30% loss in value over a span of three days. This triggered the Great Depression.
• On October 19, 1987, we got Black Monday, during which the FTSE 100, the index that tracks the UK’s 100 largest companies, plunged almost 20%, while the DJIA (Dow Jones Industrial Average), the index tracking the US 30 biggest corporations gave up 22.6%.
• On October 27, 1997, the DJIA fell 554 points or 7.2%, due to the “Asian flu” or financial crisis that emanated from the Asian emerging markets. There were global repercussions felt from these economies whose troubles stemmed from currency and debt problems (which were in part, real estate driven). And what’s a crisis without intervention? The IMF and the US stepped in to help stabilize these markets.
• Then in the following year, there was the Russian loan crisis and the fall (with subsequent bail-out) of Long Term Capital Management, a large hedge fund.
• Other Octobers, particularly in 1998 and 2000 saw big dips and volatility in the world of equities.

But here’s the reality: a study has found that October has actually closed higher 60% of the time over the past 30 years, whereas September has only done so 39% of the time. The truth is, September has been the ugliest month for investors.

I’ve often bought on dips during these down trends, practicing a contrarian approach. My contrarian strategy often leads me to rebalance my portfolio during this time of year, in order to take advantage of the lower share prices.

#2 Sell In May and Go Away

If you’re the jittery type, then you may have on occasion heeded the saying “sell in May and go away” with reference to the weakest time of the year for the stock market — typically between Memorial Day and Labor Day. Interesting notes on this seasonal trend:

To demonstrate the strength of the November through April period versus May through October, the Stock Trader’s Almanac tracks the gains you’d see if you invested $10,000 in the Dow industrials on Nov. 1 of each year and then sold April 30.

If you’d done that every year since 1950, you’d have earned $492,060 on a $10,000 investment, according to the Almanac. But if you’d reversed the whole process, and invested the compounded $10,000 during the May-October period, after 54 years you would have ended up with a $318 loss.

For the S&P, the gains would be $349,165 over the 54 years during the “best” six months and gains of $7,102 during the “worst” six months.

Other research reveals that over the past 25 years, the six months from May to October have seen stock markets rise an average 0.3% whereas the six months from November to April have seen average rises of 15%.

Here are some possible explanations for why this happens, as obtained from the publisher of the Stock Trader’s Almanac, Jeffrey Hirsch.

• This is a function of the “habitual behavior of society, which extends to stocks.”
• The second quarter of the year starts in April, a time when holiday bonuses are spent and accounted for, holiday retail sales peter out and spending gets reined in. Maybe tax season has got something to do with triggering the more somber mood in the markets? 😉 Tax refunds are likewise spent and dealt with by May.
• Summertime is when people would rather spend time outdoors, on vacation and enjoying the sunshine as opposed to thinking about the markets, which tend to be lackluster and range bound with lower trading volume during this period.
• By fall, people get back to work, to school and to getting their routine back in order. There’s a “cleaning mentality” that takes place, often extending to finances. Consequently, we expect to see September as the worst performing month for stocks. October then starts out badly but then turns out better in the end as it heralds the start of the fourth quarter, the best time for the markets.
• Big mutual funds may dump losers in preparation for the end of their fiscal year in October.
• Things turn up in November, when the holidays kick in and everyone celebrates with spending and a cheerful mood about their money. Bonuses and holiday sales get the markets going up.

Yes, the best time for the markets is usually from November to April, as holiday after holiday is celebrated. The string of retail holidays include Halloween, Thanksgiving, Christmas, New Year’s, Valentine’s Day and Easter. All that spending makes the markets happy! Again, I prefer to buy equities during the weaker seasons, when finances allow.

#3 Chinese Numerology Figuring In Stock Market Bubble?

In other parts of the world, it appears that superstition in investment markets may be more rampant. Check out this bit about Chinese arithmetic:

To professional observers, the Chinese investing public’s trust in the predictive power of numbers — rather than fundamentals like business prospects or profit — is one of many reminders of how buying on the Shanghai and Shenzhen stock exchanges looks like gambling. Brokerages are set up like casinos. Investors drink tea, smoke and chat as they make trades on computers lined up like slot machines. Instead of dropping in coins, they swipe bank cards to pay for shares.

Numbers hold a lot of connotation for the Chinese and unsurprisingly, they may have some bearing on how they play the markets. Given the meanings of these numbers,

they’ll steer away from the number 4 (oh no, death!) and chase the number 8 (for even more fortune and prosperity!). I can see how that can make their markets dance around like an inebriated dragon.

Last year, Yan Caigen bought 30,000 shares of a cement company because of its lucky ticker code, 600881, which contains a double-eight. Yan’s shares in the cement company, Jilin Yatai (Group) Co., promptly tripled, earning him about $50,000. Yan believes that the two “8s” in its ticker symbol were the good luck charm that made him money.

#4 Superbowl Stock Market Indicator

I know nothing about football but apparently, based on who wins the Superbowl, we’re supposed to be able to predict how the market’s health is going to be for the year. If the AFC (formerly the AFL) wins, we get a bear and if the NFC (formerly the NFL) wins, a bull instead. Would you believe it’s been accurate over 80% of the time? More fun facts here.

#5 The Stock Market and Hemlines

Ladies, go skimpy….er short. The less fabric that covers your legs and knees, the better it is for our stock portfolios. At least, that’s what the Hemline Theory claims! Do long skirts point to a bear market?

#6 Presidential Election Year Cycles

There’s also the presidential election cycle theory, described by the Stock Trader’s Almanac as the theory that ties market trends to presidential elections. The idea is that the first two years after an election are down or unstable years for the market due to tougher changes made by a new administration. The last two years are typically better years for our investments as the incumbent administration attempts to make a good impression on the public by keeping the economy chugging along while trying to keep its party in power for another four years.

How it works: after an election, Years 1 and 2 are down years, Year 3 (pre-election year) is strongest for stocks while Year 4 returns positive, though not as strong numbers. There’s a lot to be said about this because market behavior is influenced by party politics. History shows that “the Dow rose in 20 pre-election years of the last 24 election cycles, since Theodore Roosevelt took office in 1905!”

#7 The January Effect

We’ve come full circle with the January Effect. I wrote about this a while back, describing that however January behaves is indicative of how the rest of the year will be. It’s known to be right 90% of the time and so far this year, the January Effect is still on track. This year, after seeing a rising market from December to February, we’re currently still up for the year despite the volatility along the way!

Many more superstitions exist, but these are the ones I’m most familiar with. I’ve taken note of a couple of these indicators and have kept watch of them throughout time — strangely, some of them appear to have some bearing. In general though, I’d shrug away the superstitions and invest prudently using diversified and long-term tactics.

Only for the fun of it, you can try an Online Stock Fortune Teller, which offers its guidance to help you purchase stocks but also wisely warns that you should really seek expert financial counsel before doing so. It would be quite foolish to make moves based on a “clairvoyant stock predictor.”

Copyright © 2007 The Digerati Life. All Rights Reserved.