Every year when it comes to the month of October, equity investors noticeably turn uneasy. Especially for those investors who had witnessed or read about the US stock market crashes of Octobers 1929 and 1987. (For that matter, even a US TV presenter showed her concern about the performance of the Dow Jones Index this October.) By coincidence, the ‘October plunges’ had also occurred in 1978, 1979, 1989 and 1997 according to marketwatch.com.
Last year, one suggested that there were no October effect because the Yi did not say anything. This year is anybody’s guess – there are quite a number already in the web. The article titled “October a ‘misunderstood’ month” at marketwatch.com predicts that there will be no October plunge in 2007. By their analysis, the authors could be right.
The good news is that the global stock markets have rebounded, some reaching new highs, after the twitching of discount rates followed by a reduction in bank lending rates by the US Federal Reserve. With a simple wave of the magic wand, it seems that the global financial nightmares created by the subprime mortgage defaults, losses in CDOs and un-disgorged LBO loans, the Yen carry trades, and the subsequent credit crunch have disappeared the next morning.
The bad news is that the value of US dollars keeps getting cheaper; with foreclosures and a glut, US house prices are falling fast; oil, gold, and commodities prices have started to climb because of the falling dollar, therefore inflation may slowly rear its ugly head in the US and elsewhere.
China already concerned about the effects of galloping inflation caused by a huge rise in food prices has increased interest rates several times this year to dampen assets speculation. Instead of printing more money like the US and Europe is or will be doing, China has been draining surplus money out of her financial system and capital markets. Soon she will send money out of the country what with the set up of a USD 200 billion sovereign investment fund. Probably a much better idea than investing the sum in US Government bonds because of the falling dollar.
The original high street banks (not talking about US stock brokers and building societies in UK) are slowly but surely revealing their losses from subprime loans, CDOs and leveraged buyout loans hoping for a quick reprieve with interest reductions from the central banks. Of late, some of the high street banks had been rescuing their own hedge funds which deal with subprime loans and putting them back into their balance sheets. Now I understand better how some hedge funds get up to hundred-fold leverages. Banks have become high rollers of risky bets. No wonder the British public no longer trusts banks with their hard earned money.
In tandem with global stock markets, The Kuala Lumpur Stock Exchange has also rebounded near to its record highs. But the low liners have not followed suit. Therefore not much joy for retailers and punters. If only the KLSE had followed the Shanghai stock market which performed in line with the Yi chart for 2007, many Malaysian retailers would be quite rich by now.
In case readers still want to know how the Shanghai stock market will perform in October. Stay out. Preserve your capital or take profits.
From my records, the Hong Kong Stock Exchange plunges led another round of freefalls in the Asian stock markets on 23rd October 1997 after the Thai Baht link to the USD collapsed in August.
According to the Yi chart, there will be a few big obstacles in the month of October. I wonder if the Shanghai stock market can cross those hurdles since the Chinese Government would continue to raise interest rates and drain money from the financial system. Therefore do not be surprised if the Shanghai stock market ‘decides’ to crash sometime in October. The stock market had really enjoyed a stupendous run up till now (up 170% plus from the previous year) despite warnings from several prominent personages in mid June.
All said, the higher stock markets rise, the bigger will be the falls – in terms of points for the US and percentages for others. Remember Yi’s recent warning to me in the form of Hexagram Tun / Difficulty at the Beginning which leads to chaos and unemployment?