Monday, 1 October 2012

Mike Lenhoff: Stay the course with equity markets

Eurozone debt crisis - third anniversary?
After the crash of 1987, a ‘regularity’ of stock market behaviour was popularised in the form of a negative October effect. It might even have been introduced well before then. The Wall Street crash of 1929 occurred in October and no doubt there were lesser, but still noteworthy, incidents throughout the intervening Octobers.

However, I’m not sure when I saw a reference last to the effect. Perhaps it no longer exists – and perhaps it never did. I remember experimenting with regressions to test for a negative October effect and discovered, for the period investigated, that it was the crash of ’87 alone that gave rise to any statistical significance. Without it, there was no reason to think that October was especially ominous for equity markets.

That brings us to this October which, according to Bloomberg, ‘marks the third anniversary of the [eurozone] debt crisis’. Yet, despite the hardship, the eurozone has outlived all expectation of its demise, at least thus far, and moreover, key indices of equity market activity, notably in the US, not only reached new post-financial crisis highs last month but several indices also reached new all time highs. Not bad!

Might the gains be given up? Equity markets enter the final quarter of the year with still some way to go before their technically overbought condition is unwound. They also enter it on the week that contains two sets of big US market moving numbers; the ISM surveys and the Nonfarm payrolls. Disappointment here could induce selling. More >

Mike Lenhoff
Chief Strategist

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