Remember, remember the month of September! This is not really how the saying in Britain goes but investors were always very suspicious of Septembers. There a re numerous statistics telling us how bad the month in the financial history used to be. Well this time around the market did what it always does – it surprises investors. The September was not the month of dreadful sell-off in the developed markets and it was not the market of dismal performance.
But hold on we all know that the market is overextended. The correction comes as those lines are written. We are entering the month of October when the big, surprising and appalling and unexpected drops in the equity markets occurred. Obviously also here the equity market participants will know that although Octobers are generally good for equity markets they tend to display a very disquieting habit. Some of the most dreadful short term market sell offs tend to happen in October. So let us call it the jinx month as equity markets had to endure the sell offs in 1929, 1987 and 1997.
Great that means although we could not re-enter the equity market in September as there was no sell off but we may get a new opportunity now in October. Sudden spike in volatility paired with major sell off would be great to elevate all the worries that are again concerning the market.
Where to start with the worries? There are so plenty that it is not possible to write about all of them. IMF believes that China is a bubble. Banking sector will need to go through a major round of write offs in 2010. Price-earnings-ratios are too high and will need some profound correction. G7 will discuss Euro and the persistent strength of the currency. Economic data started to deteriorate and will continue to do so. Not to mention the debt bubble and the deflation or Japan-like lost decade scenario.
Just reading through this short list makes an investor queasy and run away from the equity market. Could it happen that the majority is right and the market will correct significantly? This would be a rather rare and significant event.
October tend generally to be the beginning of the good eight months for performance especially in US equities. The timing may be a bit of a problem. It is not always the beginning of the month. It could be very well the tail end of October which leaves plenty of time for a tremendous market correction in the mean time. If it occurs who will be brave enough to buy into the correction. Or rather will it be argued that it is just the beginning of a new leg of the bear market?
