Getting Past the Crash

What is it about October and the stock market? A lot of theories seeking to explain the market's propensity to crash during October have been advanced over the years. Late last week, I ran across a particularly novel one: It's all about the moon.

Seriously. Back in 1998, a technical analyst named Christopher Carolan won the Charles Dow Award -- given for "excellence and creativity in technical analysis" -- for a paper that looked carefully at the historical phenomenon of October market panics. Technical analysts love statistical correlations, and Carolan found a doozy: According to his paper, many of history's biggest stock market panics around the world occurred within hours of a specific point on the annual "lunar calendar," one that typically fell in mid-to-late October. Carolan referred to those times as "dark days" for the market.

To be fair, Carolan has not, as far as I can tell, pushed this discovery as any sort of sure-fire predictor of market crashes. Rather, it's more something for traders and money managers to keep in mind during volatile times. That seems reasonable. But it's interesting to note that this year's "point of maximum panic," per Carolan's thesis, occurred over this past weekend. Sure enough, overseas markets had a rough ride on Monday morning -- with Hong Kong's market, down more than 12%, looking pretty well panicked -- and U.S. markets opened lower, though selling wasn't intense. But now that we're past the "dark days," everything should start to ease off. Right?

Gosh, I hope so. But statistical correlations or no, I’m not comfortable making any predictions these days, aside from some very broad ones: Eventually, the market's volatility will abate, and eventually, corporate growth will resume, buyers will step back in, and prices will begin to rise in a sustainable way.

Meanwhile, there's still a lot of fear out there, despite plenty of suggestions that it's time to buy. What's the sensible course?

Buy, but buy carefully
Early in my investment career, a well-regarded portfolio manager told me his rule of thumb: "When stocks are down, buy. They'll go lower. Ignore that. When stocks are up, sell. They'll go higher. Ignore that. Apply this rule consistently and you'll make money in the market."

His point was that trying to time absolute tops and bottoms isn't reasonable. And I think that's worth taking to heart right now. I don't know whether we're at the bottom, near the bottom, or still another 10% or more from the bottom. But I do know that markets around the world have lost a huge portion of their value in recent weeks, that a lot of that loss was due to panic selling, that panic abates eventually, and that nothing drives the prices of good companies down as fast or as thoroughly as panic selling.

Prices will rebound. Those who buy here will make money when they do. And those who buy the biggest values here -- the stocks that are the most underpriced relative to their intrinsic value and prospects -- will make lots of money.

There are some crazy values out there. I just used the Fool's CAPS screener to find heavily discounted mid-cap stocks that are highly rated by the community. Here are some intriguing ones from my quick search:

Stock

CAPS Rating (out of 5)

Price to Earnings

Price to Book

Atwood Oceanics (NYSE: ATW  )

*****

7.2

1.82

Baker Hughes (NYSE: BHI  )

*****

6.1

1.48

Genuine Parts (NYSE: GPC  )

*****

10.6

1.99

ITT (NYSE: ITT  )

*****

8.8

1.56

Lincoln Electric (Nasdaq: LECO  )

*****

6.6

1.29

Noble Corp. (NYSE: NE  )

*****

4.7

1.44

NVIDIA (Nasdaq: NVDA  )

*****

7.5

1.38

Source: Motley Fool CAPS.

There's definitely a theme there: Oil and gas exploration, auto parts, welding equipment -- all corners of the market that are either out of favor at the moment but supported by longer-term trends, likely to perk up during a recession, or both. Are any of these buys? I'll need to do more research to be sure. But they're the kinds of stocks that are worth a close look right now: stocks with a "margin of safety," limited downside and big upside potential that isn't dependent on market whims -- or phases of the moon.

If you'd like some help with your search for value, the Fool's Inside Value team is on the case with up-to-the-minute recommendations and commentary to help you find the best buys amid the market's chaos. You can check out its latest ideas for free with a no-obligation 30-day trial.

Fool contributor John Rosevear has no position in any of the stocks mentioned. Genuine Parts is a Motley Fool Income Investor recommendation. ITT is a Motley Fool Inside Value selection. NVIDIA and Atwood Oceanics are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters free for 30 days. The Fool's disclosure policy knows that howling at the moon only annoys the neighbors.


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  • Report this Comment On October 27, 2008, at 3:35 PM, SMMcPherson wrote:

    Carolan's analysis of the "dark days" for the market occurring within hours of a specific point on the annual lunar calendar earns him the highly sought after and unreachable mystical

    "Book of Voodoo Communications"

    "God Already Knows What You are Thinking Now and Beyond Thoughts Futures Exchange" Supernatural Trader Award.

  • Report this Comment On October 28, 2008, at 7:04 AM, TMFMarlowe wrote:

    His paper is pretty interesting. I should have included a link in the article, but definitely Google it up and take a look.

    And hey, overseas markets are up sharply as I write this early Tuesday morning -- maybe there's something to the idea that the worst is behind us for awhile. Here's hoping!

    John Rosevear

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