Will This October Be Like so Many--a Stocks Downer?
October has a reputation for being a lousy month for stocks. Remember the crash of ‘87? The mini-crash of ‘89?
Apparently, a lot of investors remember--so many, in fact, that the level of nervousness going into this October already is extraordinarily high.
Which begs the question: Can stock prices collapse if everyone expects them to?
One measure of investor sentiment is a weekly poll done by the Investors Intelligence market information service in New Rochelle, N.Y. The poll asks about 130 independent investment advisers (mostly stock newsletter writers) to put themselves in one of three categories: outright bullish, outright bearish, or merely expecting a short-term pullback in stocks--a “correction”--before prices climb again.
Here’s the sentiment tale of three Octobers:
* 1987: As stock prices hovered near record highs, 47.2% of the advisers still were bullish at the start of October. Only 25.2% were bearish. The majority was wrong, of course, as the 508-point plunge in the Dow Jones industrials painfully demonstrated on Oct. 19.
* 1989: Early in October, the bulls were even more in force--51.2% of the Investors Intelligence poll. Just 27.3% were bears. Much to the bulls’ surprise, the Dow tumbled 190 points on Oct. 13 in a selloff that heralded the end of takeover mania.
* 1991: Scared off by seemingly high stock prices and memories of other October crashes, the bulls stand at just 40.7% as the month begins, down from 48.2% in early September. The bears, meanwhile, total 31.5%. The other 27.8% of advisers expect a correction.
So as this October dawns, nearly six out of 10 investment advisers expect a drop in stock prices of some magnitude soon.
To the “contrarians”--investors who believe that the majority is always wrong--the bullish minority is a terrific sign. “I think the surprise is that October is going to be an up month for stocks,” says Andrew Addison, who writes the Addison Report market newsletter from Franklin, Mass.
Despite recent weakness in the Dow and the destruction of some formerly high-flying small stocks over earnings disappointments, Addison says “more than half of all stock (industry) groups are acting positively,” meaning the shares still are moving up rather than breaking down.
What’s more, Addison says, look at the continuing strength in brokerage stocks such as A. G. Edwards and Merrill Lynch, which remain near 52-week highs. “The stock group that is probably the most sensitive to a potential October smash is doing great in the market,” he says.
Some analysts, however, don’t buy the contrarian argument. In fact, some say, the contrarian case about this October’s bullish minority now is so well known, the true contrarian must be a contrarian to the contrarians --i.e., bet on a market plunge this month.
Huh? Well, here it is in (hopefully) more plain English from Richard McCabe, one of Merrill Lynch’s top market analysts in New York: McCabe figures that a lot of the investors who say they’re bearish or expect a correction soon aren’t taking that stance out of fear--which would be normal--but rather out of hope.
“They’re looking for a correction because they’d like to buy” at cheaper prices, McCabe says. Remembering that the declines in October, 1987, and October, 1989, produced great buying opportunities, these investors have persuaded themselves that they’ll jump in just as soon as prices fall 5% to 10%.
The problem, McCabe says, is that these “bearish” investors are bearish in word but not deed. If they really expect a decline, they should be selling stocks now to raise cash and thus prepare for lower prices on better stocks later in the month. That isn’t happening on any significant scale, McCabe says. “They’re talking about an October decline, but they’re not acting that way.”
McCabe’s fear is that, if a selloff were to begin, many of the investors who figured that they’d be buyers in a correction would suddenly find that they don’t have the cash to buy much of anything. Instead, if prices quickly slide, these investors could panic at the thought of losing the big paper gains they’ve accumulated in many of the stocks still sitting in their portfolios. That could cause wild selling as money managers scramble to save their skins.
Is that the way we’ll remember this October? McCabe could be underestimating the willpower of both the bulls and the bears. But if he’s right, and too many of the declared bears are just paper tigers, things could get messy in a hurry if the market continues to crack.
Moral: Be careful out there.
Briefly: The National Assn. of Investors Corp., an umbrella group of investment clubs for individuals, holds its ninth annual “Investors Fair” at the Proud Bird Restaurant grand ballroom near LAX on Saturday from 8 a.m. to 4 p.m. Registration at the door is $28. Group discussions will cover such topics as market timing, mutual fund selection and when to sell stocks. For individuals who truly enjoy the stock market, this could be a good opportunity to meet people of common interests.
