The October Curse

1314884475000 » Tagged as: cse , January Effect , October Curse

The Financial Times is a publication that appears to be staffed almost exclusively by PR men moonlighting for large companies and stock broker firms. At least 90% of space is set aside for press releases. That’s a lousy statistic but I am adhering to the same standard as the FT.

Todays’ edition carries an article titled 'Super September' It argues that September is a great month for the Colombo Stock Exchange and says: ‘September has produced an average positive movement of near 10% throughout 2002 and 2010 with last year producing the best return of near 24%’ Mark Twain did speak of “Lies, Damn Lies, and Statistics” but the above statement is not statistics it’s just ignorance (or damn lies, take your pick)

The FT doesn’t say what exactly they mean when the use the term average, but if you add up the reported percentage gains for September in each year and divide by 8, you can arrive at a figure of 9.76, which is the Arithmatic Mean for those figures. The trouble is you cannot use arithmatic means with percentages.

Consider this. Suppose the price of a security rises 10% in 2008, followed by another 10% in 2009 and then declines 10% in 2010 so going by the FT logic, you would say the share has gained an average of (10+10-10)/3 or 6.67% but in actual fact the price of the security at the end of 3 years will be 107.9! hardly a 20% gain is it? A 10% gain in one month followed by a 9% drop get’s you back to square one.

There are plenty of studies showing that trading stragies based on the hope that prices will rise in a particular month (eg January Effect) or fall in a particular month (October curse) is not an effective trading strategy. Some authors just say don’t trade on hope.

Many famous and gut wrenching market crashes have happened during the month of October, starting with the grand mother of them all the ‘Great Crash’ of 1929. Then there was the Black Monday of 1987. Old hat you say? Well there was the ‘Mini Crash’ of October, 1997 and very recently the  Nikkei plunged 9.4% on October 17, 2008

Want something closer to home? The CSE all share plummeted 5% in a single day on October 13, 2010.  Only the automatic trading halt that’s in place prevented a bigger sell off. Immidiately afterwards the government intervened to stabilize the market. So at the end of the month the All Share Index had lost 4.5% . But look at the figure for 2008;  there you can see a  15% drop

It will take a brave man to trade on this newspaper story, on the other hand fools rush in where angels fear to tread and the story could well become a self fulfilling prophesy. If that happens surely the October curse will be fulfilled as well?

“Wake me up when September Ends” (Green Day (the Band))

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