Share Price Performance History - The October Effect?

With October just around the corner, I thought it might be a good time to investigate the stock market phenomenon known as the October Effect.

October and Share Price Performance

There is a theory held by some (many?) investors that share prices have a habit of falling during the month of October. Both the 1929 and 1987 crashes happened in October.

This is known as the October Effect or the Mark Twain effect.  This name comes from the 19th century novel Pudd'nhead Wilson in which Mark Twain wrote:

"October. This is one of the peculiarly dangerous months to speculate in stocks."

He then went on to say:

"The others are July, January, September, April, November, May, March, June, December, August, and February."

Do Share Prices Really Fall In October?

While the October effect is considered to be a psychological effect only, what interests me is whether the collective nervousness of investors will push prices down temporarily and create a buying opportunity. I wonder whether investors fear of the month of October can become a self-fulfilling prophecy.  Do nervous investors start selling at the start of October thereby adding to the legend of the October Effect?

So with that in mind I did some research on how the All Ordinaries (a broad based share price index for stocks traded on the Australian Stock Exchange) performed during October for each of the last 29 years.  (29 years was as much data as I could find on Yahoo Finance)

The first graph shows yearly share price performance for each of the past 29 years, in monthly intervals.  In this graph, I was looking for a consistent decline in October of each year, or failing that a fall in enough of the years for there to be a discernible trend.

All Ordinaries Share Price Comparison - Percentage Change Per Year

While there were certainly a few years in which prices dropped in October (1987 - I'm looking at you), there seem to be many more trending up.

So next I tried looking at the data in a slightly different way.

The next graph is a little harder to understand.  It is the monthly change in share prices.  So rather than each line representing the performance over the entire year, the line tracks the change in share prices from the beginning to the end of each month.  Once again I was looking for an obvious pattern.

All Ordinaries Share Price Comparison - Percentage Change Per Month

And once again, while 1987, 2008 and 1997 stand out, the rest are just a jumble.

The last thing I did was to summarize the best, worst and average share price gains or declines for each month over the past 29 years (sorry no fancy standard deviations or the like - what do you expect for free?).

All Ordinaries Monthly Share Price Summary - 1994 to 2013

This tells me that the worst month over the past 29 years was definitely October.  It also tells me that average performance in October is -0.6%, which is equal worst of the averages.

Conclusion

None of this causes me to think it's worthwhile selling up at the start of October while hoping to buy in again more cheaply as the month unfolds.

I suspect that October should be treated as any other month.  Keep my eye out for bargains and buy them when they appear.  And sell any holdings which have reached my estimate of full value.