Blogs & Comment

Stock market rules!

A modest proposal about stock indicators.

(Photo: Will Crocker/Getty)

As regular readers of this column might recall, I meet every second Thursday with a group of other investment professionals to share our views on the current market and where it might be going. Today was one of those Thursdays.

Of course, I’m not permitted to share the details of these meetings, but I can tell you that an important part of our discussion centered around the fact that it’s now September. And that’s significant for two reasons.

First, September is historically the worst month for equity markets. Although October is noted, at least over the past three decades, for some spectacularly bad market plunges—in October 1987 (Black Monday), October 1989, October 2008 and others—September has been even worse.

(That fact belies Mark Twain’s famous comment: “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”)

The second September reference today was that it will be interesting to see how the Labour Day Indicator works out this year. Essentially, this indicator says that if the stock market falls in the four trading days following Labour Day, then investors should get out of the market for the next month. That would put the index at an interim low early in October, a good time to buy, after which a rally would kick in for the remainder of the calendar year.

Alternatively, if stocks rise over those first four days, the theory says the rally has a good chance of continuing, and so investors should stay invested.

Let me say this: These ‘rules’ are bunk. The stock market is random—it inexorably goes up over the long term, but it doesn’t follow patterns such as concentrating its gains in particular months, or depending on the first four trading days of September, or based on the U.S. Presidential election cycle.

It’s naïve at best to try and simplify the complexities of the stock market to simple rules, because the market doesn’t follow any rules. Some years it follows one or more of the patterns cited above, but a lot of years it doesn’t—too many to run a market timing trading program profitably.

The world is rife with explanations purporting to explain the inexplicable. Many of these explanations—later proved to be wrong through experience and education—such as why the sun comes up every morning (because the rooster crows; if the rooster one day didn’t crow, the sun wouldn’t come up that day), are relatively harmless. But predicting future market trends based on previous anecdotal or empirical experience can be deadly.

For what it’s worth, I happen to be bullish right now on Canadian equities, especially as of mid-morning last Friday, when the S&P/TSX 60 Index took an intraday nosedive and I bought a bunch of calls on that index. My sentiment has nothing to do—contrarian or otherwise—with how previous Septembers have fared, or the Presidential cycle, or how the market might perform over the next four trading days.

It does have to do with Japan, Italy, Greece, the U.S. federal debt crisis, Libya and Hurricane Irene being in the rear-view mirror, and a similar chain of catastrophes being less likely to occur over the next few months. It has to do with my personal judgement of the greater investor psyche right now as it tries to rebalance its attitudes toward fear and greed.

It has nothing to do with pat rules.