As usual, October lives up to its notoriety

Updated: Oct 31 2005, 05:30am hrs
October is the worst month for investments. No, I am not taking a leaf out of Mark Twain when he said, `April is the most dangerous month to invest in stocks. The other months are January, February, March, December. A study shows that the Sensex loses 2.6% on an average in October.

Since 1990, the Sensex has gone up in only five out of the 16 years since 1990 and this year too is not an exception. This year, the fall in Sensex value in October compared to September close is 896 points or 11%. If one were to calculate the slide in the Sensex from the all time high mark of 8821 seen on October 5, the slide is more severe of 1,136 points or nearly 13%. What has resulted in this slide Lets take a look.

I have always believed that while the India story has its own stickiness, our markets will have to take the global cues into consideration and therefore cannot rise in isolation. High inflation concerns in the US have given way to fears of more interest rate hikes from the current 3.75% , even after 11 hikes of 0.25% each on the trot. Just about the time when we light our lamps and burst crackers this Diwali, the wise old men of the FOMC will be huddled together in their teak- lined boardroom to consider yet another hike in interest rates. Economists expect the Fed to pause when it has reached at least 4.5%. That would be still 12 weeks away.

This regime of high interest rates has contributed to the dollar becoming stronger. FIIs who dabble in carry trade find this not remunerative enough and there fore have taken some money out. This purchasing of the dollar has made it stronger, which in turn has prompted more selling. A strong dollar is both the cause and the effect of the FII selling. The FII selling has in turn brought the markets down.

The other reason is that we are not alone in the fall. Markets the world over have staged a retreat. Whether it is the developed world of Japan (3.2%) and US (4.4%) or the emerging economies of the South Korea (6%) or Brazil (8%), each one of them has shed some weight. Another reason for the fall that no one on Dalal Street saw coming was that the markets had risen sharply ahead of the quarterly results. Take a look at the sharp rise in the Sensex and other indices from June end to October highs.

When the markets rise sharply ahead of the results, it is difficult to see a follow-up bullish phase post results. That is reason number one for the fall.

Two other possible reasons for the fall are slightly technical. With the markets closed for trading on November 3 and 4 on account of Bhai Dooj and Id respectively, there would only be two full working days this week, October 31 and November 2, with markets remaining open just for 90 minutes on Diwali for the Muhurat session. That may have prompted lower carry forward into the November settlement. And the final reason is purely technical.

With sharp losses suffered in the month some of the sell orders may have been system triggered as key support levels have broken both in the Sensex and individual stocks. Expect the markets to take firm direction only after November 7, when the market re-opens for a full week.