What is the October Effect?
The October Effect is the theory that stock prices will fall in the month of October.
How Does the October Effect Work?
In general, investors create a self-fulfilling prophecy regarding the October Effect. The crashes of 1929 and 1987 both occurred in October, so some investors believe the month is somehow forever tainted. If enough investors believe the October Effect exists, they will sell their shares early in October, thereby depressing prices and creating the very effect they intended to avoid.
Why Does the October Effect Matter?
The October Effect is just one of many superstitions that distract investors from doing fundamental and technical analysis of their existing and potential investments. Other psychological effects include the Super Bowl Indicator, the January Effect and the Hemline Indicator (click here to read more about 4 Wall Street Superstitions that Just Won't Die).