The bogey of Oct Effect: 'Month of market crashes' spooks trading community

For something that started out as a throwaway line, the ‘Mark Twain Effect’ has taken on a life of its own. This line ‘October: This is one of the peculiarly dangerous months to speculate in stocks’ is often referred to when the stock market reports slower returns in the month of October — often striking fear that a downturn is on the horizon when the autumn weather begins to roll in.

Market activity during Diwali tends to be heavy-footed — particularly if the Festival of Lights falls in October, reveals an analysis by ICICI Securities.

The average daily trading volume (ADTV) for the National Stock Exchange’s equity cash segment has declined sequentially in seven of the 11 years, shows the study by the brokerage.

ADTV is the average number of shares traded within a day in a given stock.

“Market activity is usually subdued in October. There are market holidays and traders mostly don’t take very aggressive bets during the festival season,” says Prakarsh Gagdani, chief executive officer, 5Paisa Capital. ADTV fell 19 per cent month-on-month this year and 18 per cent last year in the Diwali month.

Interestingly enough, ICICI Securities says the ‘festive factor’ may not be the only reason bedevilling volumes. “The October Effect refers to the psychological anticipation that financial declines and stock market crashes are more likely to occur during this month than any other month,” says the brokerage in a note.

Some of the worst stock market crashes globally —  such as the one in 1929 and 1987 —  have happened in October. Evidently, Diwali is celebrated in October/November.