October is historically known for the stock market crashes that have happened in this very month throughout history. Some of the biggest declines took place in October including 1907, 1929, 1987, and 2008. It started to feel like October 2014 was going to go down as another year with a stock market crash, which has ultimately turned out to be a simple market correction. None-the-less, it’s curious to contemplate why the market waters get choppy in the month of October.
One of the things that I have come to find with the markets is that bull markets go higher than anyone could imagine and bear markets go down more than anyone could imagine. The other thing I’ve come to find, is that markets become self-fulfilling prophecies of conventional wisdom. This could be the very reason why investors get weary and sell happy in October — and who could blame them after a 5-year long bull market.
A couple weeks ago, everyone was in a panic and the markets were being sold-off pretty substantially; but here we are with markets snapping back quicker than they fell. The S&P closed at a record high this week after a rough patch of selling that took place. The Dow Jones this month actually had a 450 point decline during intra-day trading.
Here’s an image of the S&P 500 and you can clearly see how fast everything corrected and recovered:
It’s hard to say if we are going to see a major crash because no one truly knows what the future has for stocks, commodities, or bonds. The best people can do is invest with probability and inevitability. It’s extremely healthy for long-term investors to see corrections in the price of stocks. If everyone bought a stock at $1 and the stock shot up to $10, every single one of those share holders are happy sellers as long as there is a profit. In this situation, everyone could sell and be happy but the stock would most likely collapse, bring prices back to $1 and below. Consider the structure of the share holders if everyone purchased at $1 and the stock then went to $2. If at that point, some sellers sold taking profits and the price corrected down to $1.50, this would give an opportunity for new buyers to come in a buy at $1.50 which will establish “support” at this level. It’s a much more stable environment than a stock sky-rocketing to $10 overnight. The new buyers are not happy sellers at $1.50, and would want to see the price go higher before they sold. The structure is much healthier for a stable stock market as opposed to one that goes straight up too fast.
Some argue that we have seen this happen over the past 5 years. I tend to agree with this assessment, however, I’m pleased that we saw approximately a 10% correction in the major markets during the month of October allowing old money to flush out and new money to build some support.
Chief Editor at CrushTheStreet.com