The ghost month and the stock market

For the Chinese, the seventh month of the lunar year is the time when the gods open the Gates of Hell and allow the spirits, usually confined to the underworld, to roam on earth among the living. Known as the month of the Hungry Ghosts, it is a period when people honor the dead by offering food, prayers, burnt incense and paper hell-notes to appease these roaming spirits.

The month is also viewed by many Chinese as an inauspicious month to start anything, whether be marriage, moving houses, opening businesses or starting new investments. Thus, regional stock markets, especially those with predominantly Chinese investors, experience relatively lower volume and usually falter during this period.

In addition, this is also the period when most European and American fund managers take their vacations during the dog days of summer. Named in early times by people in the Mediterranean to describe the period when Sirius (the dog Star) comes into conjunction with the Sun, the dog days of summer refers to the hottest phase of the year — the West’s version of opening the Gates of Hell.

The stock market’s boogeyman

TIn a past article (Santa Claus rally and the January effect — Philequity Corner, Dec. 26, 2005), we showed that seasonality in the stock market is very evident during the months of December and January where stocks tended to have their biggest monthly gains. In the same manner, our study showed that stocks behaved poorly during the months of August and September.

Ask advice with any old timer in stock market and he’ll tell you to stay away from stocks during the Chinese ghost month. Indeed, the table below shows that stocks tended to perform poorly during this period (12 out of the last 19 years), registering an average loss of 4.1 percent.

Double whammy

TThis year is a double whammy of sorts because of the occurrence of a double ghost month. The Chinese lunar calendar (as the name implies) follows the cyclical movement of the moon. Therefore, in the Chinese calendar, a year has a total of 354 days or 11 to 12 days shorter than the solar year. To balance the lunar and solar calendars, a leap lunar month is added every three years. And this year, the leap month occurs in the seventh month with the regular seventh month from July 25 to Aug. 23 and a leap seventh month from Aug.24 to Sept. 21.

So far, the Philippine Stock Exchange Index (PSEi) is up 3.9 percent since the ghost month started last July 25. Will it stay up or will the jinx of the ghost month finally haunt it in the end? Only time will tell.

Trading simulation

THeeding the old advice of staying out of the stock market during the ghost months should have earned investors more money in their pockets. A simulation below shows that if one peso was invested in the PSEi in 1987 and a strategy of selling before the ghost month and buying it back afterwards was employed, the investment would now be worth P15.10 (or an annual compounded rate of 14.8 percent). Meanwhile, a simple buy-and-hold strategy would have resulted to only P5.01 (or an annual compounded rate of 8.6 percent).

Simulation— staying out during the ghost months

TDespite giving 14.8 percent return for the last 19 years, staying out during the ghost months is not a full-proof strategy for investment. Clearly, the chart above shows that the same investment is barely higher now than its value back in 1994 (only 1.8 percent compounded per annum since 1994). In comparison, our Philequity Fund has yielded 20 percent per annum over the same period.

At best, the strategy of steering clear of the markets during the ghost month only acts as a guide for a single one month in a year. In the end, what counts is how well you perform during the rest of the year.

• Next week, our article will be on the Philippine peso which has recently broken into new highs. Just as we had forecast since the start of the year, the peso is now near our year-end target of 50 against the US dollar.

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