What Is the October Effect and Why Many Don’t Care
As much as uncertainties, traps and opportunities fill the stock market, you also have distractions that could lead you to make potentially harmful decisions without carrying out the required homework. Fortunately, commission free stock trading can enable you to maximize your earnings. But there really isn’t any substitute for research.
October Effect Following the September Effect
As September began, you would have heard of the September Effect. Come October, and you have the October Effect. But unlike the September Effect, the October Effect doesn’t have a ton of statistics supporting it, and is therefore considered as more of a psychological factor playing in investors’ minds. They base their hunch on some major market crashes in history that have happened in October. As you’ve guessed, the October Effect is a perception that stocks decline during the month.
Weak Historical Evidence Specifically Pointing to October
The various events that happened during October in history have been Black Monday on October 19 in 1987; Black Tuesday, Thursday and Monday in 1929; and the 1907 Bank Panic.
* As you can see, the latest instance of an October crash was in 1987 when the Dow sank 22.6% in just one day! This was the greatest one-day decline recorded.
* Since then, though, there has not been any such decline in October. What happened in three days in October in 1929 was the result of an elaborate process contributing to the Great Depression.
* The oldest recorded instance is the 1907 incident, but that was before the establishment of a central bank such as the Federal Reserve, and can be blamed on loose monetary policies by the US Treasury that resulted in speculative investment building up.
Just Be Prepared for Volatility in October
So, in the normal course of events, is the October Effect something to fear? What you need to remember is that October is when stocks are the most volatile, as we are also seeing this year. Investopedia quotes LPL Financial research as stating that, from 1950, October has been seeing more swings of 1% or more in the S&P 500 than in any other month. It’s September, though, that has more down markets.
The earlier instances of October market crashes were all the result of catalysts that happened much earlier in the year. So, can the whole October Effect be ruled out as a myth? That’s what modern investors would say, since, though a historical perspective is important, the occurrences of a market crash in October are too few to be seriously considered a factor. If anything, the October Effect can be considered a distraction for investors, keeping them from carrying out technical and fundamental analysis to measure the strength of their investments.
Commission free options trading is around to give a boost to stock traders starting out for the first time. However, at whatever stage of your trading career you may be, make sure not to fall for distractions such as the supposed October Effect.
