WHY WE WILL NOT SEE A RED OCTOBER
EVERYBODY is saying it: the correction is coming. After rallying since March and with various records being broken, it is claimed that global stocks are overdue a sell-off. Analysts are desperate to tell us that “investors have become over-excited with the positive-trending economic data” or that “the fundamentals are being ignored”.
Commentators are falling over themselves to predict just how big the correction will be: I’ve heard anything from five to 17 per cent in the last few weeks. Even the Elliott Wave fans are claiming this is still all just one big bear market rally, ready to come crashing down again any day now. And with it being October, the conditions for the “perfect storm” are apparently complete: three of the biggest market crashes of all time – 1929, 1987 and 2008 – all occurred in October. What else is there to do now but get short?
Even if it is just to play devil’s advocate, here are four reasons why there won’t be a correction this month.
First, markets generally do the opposite of what the majority expects. Historically, corrections occur when all you are hearing is bullish talk, not when everyone is taking the market down. And with the third quarter earnings season about to get underway, the markets are already pricing in a few horror stories. A Thomson Reuters survey suggests S&P 500 firms will report an average decline in year-on-year profits of nearly 25 per cent for the quarter.
Second, I mentioned the fact that October represents a bad month for stocks. In fact, September is the worst statistically, and we came through that rather well.
Third, the essential ingredient which has propelled stocks higher since March is still present: massive government stimuli. The huge and calamitous systemic risk which was very much present a year ago is no longer.
Fourth, most people missed out on this rally. They missed out in March, and they missed out in the summer due to the “sell-off is inevitable” nonsense that prevailed even then. As a result they now see any short term pullback in share prices as a buying opportunity. “Buying on the dips” should continue to underpin the market.
Yes, there are signs that markets are coming off the boil. Some of the data out of the US is suggesting that its economy may not be pulling out of recession as quickly as had been hoped. If this trend gathers momentum it may well present the markets with the opportunity for some short-term profit-taking. But a red October should be avoided.