Close your eyes to the Adam Cheng effect at your peril

Superstition plays a special role in Hong Kong investing. All it takes to anticipate stock market swings is to know what others believe is true

PUBLISHED : Monday, 08 April, 2013, 12:00am
UPDATED : Monday, 08 April, 2013, 3:09am

Should investors be quaking in their boots in anticipation of the release of a new movie starring Adam Cheng Siu-chow? According to an article in this newspaper on March 30, the answer is yes. The Post reported that the actor is unwittingly responsible for what has become known as the "Ting Hai effect" that followed the 1992 release of TVB drama series The Greed of Man, in which Cheng played the role of Ting Hai, a derivatives trader who makes a killing shorting a bull market. And sure enough, while the series was screening, the Hang Seng Index dropped by as much as 13 per cent.

Five years later, Cheng was back in another television series whose run coincided with another plunge in the market. In 1998 he was at it again, with a series that coincided with the Asian financial crisis, and then again in 2000, when the hi-tech stock bubble burst.

So stock market wags are wondering whether the new series will have the same effect or whether it might just be an excuse for a market plunge. Superstition is no stranger to people's thinking in Hong Kong, and so an explanation for stock market movements based on seemingly illogical beliefs, folklore or whatever is not quite as absurd as it may sound.

Indeed there is no need to confine this theory to the Hong Kong market, as superstitions and folklore looms large in markets across the world.

My two favourite American examples are the so-called Super Bowl and hemline effects on stock market performance. The former holds that if the National Football Conference wins, the stock market will rise, and that if the American Football Conference prevails, it will fall. The hemline theory holds that as hemlines rise, so do stock prices, and that the reverse happens when they fall.

How does this stack up against the historical evidence? Well, stocks boomed in the 1920s, when the short flapper funk was in vogue, and they famously crashed when hemlines fell. Prices remained in the doldrums until the 1950s, when high poodle skirts made an appearance, and so on.

More compelling evidence appears to exist for a near-universal belief that October is a dangerous month for stock markets. Both the 1929 and 1987 crashes occurred in October. Yet the Stock Trader's Almanac tells us that, overall, September has been the worst month for stocks.

Some so-called superstitions have a perfectly logical explanation. This includes the Presidential Election Cycle Theory developed by Yale Hirsch, which holds that US stocks are weakest in the year following an election of a new president, but that there should be an upturn the following year. This makes sense because markets dislike uncertainty and a change at the White House creates precisely that.

When I first started covering markets in Britain, there was an old adage much beloved of stockbrokers: "Sell in May and go away". Those were the days when people took long summer holidays and trading was thin and volatile. It therefore made sense to clear the decks and come back later.

There is even an algorithmic trading programme for stocks based on superstitions: "Sid the Superstitious Robot".

Markets are moved by sentiment, even though most players pride themselves on sticking to the fundamentals. Therefore it makes sense to be aware of factors affecting sentiment. Superstition and folklore clearly play a part, so be careful before sniffing too loudly over Adam Cheng's impact on the local bourse.