Historically, October is seen as a worrying month for financial markets where bad things can happen. The “October effect” scares everyone and Black Monday of 1987 is usually highlighted as a prime example.
Many would tell you to be wary of Oct, to sell in Sep and then try not to blow yourself up the following month. There are a number of reasons for this. The main one would likely be that everyone in the financial world is trying to have their last shot at hitting their budget before the year starts to wind down from Nov onwards.
Management usually advises traders to reduce their positions and cut limits into year-end as liquidity dries up ahead of the holiday period. Bid/Offer spreads traditionally widen by mid-Nov as everyone will be going for their yearend break. Volatility begins to make the stock market swing up and down violently as many are quick to make small gains while trying to avoid a possible freight train move heading their way.
Somehow or other, major economic events seem to want to happen around this time to spook the world. We just saw Israel’s worst moment in its history with the Hamas invasion on 07 Oct. It totally blew the minds of everyone and forced us to take sides immediately. The more one reads into this matter, the deeper one realises that it is more complicated than what it seems on the surface. That like an onion, there are many layers to the issue once you begin to peel off the layers.
The Ukraine war is experiencing its 2nd winter soon as another offensive is in the cards with more sophisticated weapons being deployed, courtesy of America. Additionally, the upcoming development of the Gaza assault by Israel will keep us on our toes as we head towards the end of Oct. More volatility is to be expected ahead.
Bond prices have been having wild gyrations in recent times as Powell talks about keeping rates on hold for now for possible future hikes. Gaza and Ukraine tensions are causing concerns that rising oil prices might be stroking the inflation monster again.
Since the aggressive rate hikes of 2022, all bondholders that had them in their portfolio before Jan 2022 have suffered big unrealised mark-to-market losses. Take my 10-year AAA S’pore bond holdings as an example. It was paying a coupon of 2+ % when I bought them a few years back. The MTM was 108 pre-Fed hikes and when I last checked, they were at 96, a 12-point drop in value.
Can you imagine what it looks like for all the banks in the world that had to keep bonds in their portfolio as part of reserves liquidity management? They would be sitting on a big unrealized loss which some economists estimate a hole to be as large as $650 billion! They would have no choice but to sit them out to maturity in order to avoid the losses. These bond tenors could be as long as 30 years!
Separately, I had been setting a reminder to myself to hedge my stock portfolio ahead of the Oct effect. I wanted to just buy an S&P Put that expires beyond Oct, in case the stock market bottom fell off. I was unsuccessful as I could not find an appropriate index option to buy over the last few weeks in my Saxo account. And the month is already coming to an end.
Is this a period of opportunity to take advantage of the swings for investors to bottom fish for bargain hunting of stocks? I had been looking to buy back some of the Nvidia and Tesla stocks I had sold a few weeks ago when I found the markets too frothy for my liking. I had placed some bids for about a month and some of them were triggered last night. I have also been looking at ARM since its IPO a while ago. I did not want to chase it up as I felt the value was overpriced and should soften from those levels. It hit a new low last night and also triggered my buy order.
Halloween is also around the corner and that makes people behave a little more weirder than usual too. We are entering into the year-end holiday mood as the final quarter of the year plays out. 2023 started with a bang and may end with a bang too.
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