This time of year is always a little ominous for traders — especially those traders who subscribe to investing superstitions.

It’s almost like Friday the 13th or the Ides of March. Maybe you can’t quite put your finger on it, but there’s just something menacing in the air.

It’s called the October Effect — the theory that stocks have a tendency to decline in the month of October.

Experts agree that statistics don’t support the theory; it’s mainly psychological.

But still, the month of October usually has investors on their toes.

Aside from Halloween looming around the corner, there are some intriguing historical factoids that make the month of October slightly sinister.

Nine out of the 16 largest stock market crashes in history occurred in October.

This year, the most foreboding connections are being made between the current economic climate and Black Monday, which took place on October 19, 1987.

Rich Barry, the NYSE floor governor, brought this to everyone’s attention in an email last week.

Barry writes:

Traders note that this Friday, October 16th is an Expiration Day. Traders with long memories recall that 28 years ago, October 16th fell on a Friday and it, too, was an Expiration Day. That October 16th was notable for two things. First, the Dow fell 108 points that day and that was the largest one day point drop in this history of the Dow index. The other thing of note was that it was the prelude to Monday the 19th, when the Dow fell 508 points or 22%, the greatest one day percent drop in the Dow — before or since.

We’re witnessing the drawing of some thin parallels this week, the 28th anniversary of Black Monday, when an estimated $500 billion in earnings was wiped out in a single day.

We could focus on the coincidences, as Barry is.

We could all tremor over the fact that the third Monday in October of 1987 was the 19th, same as this year. (Eerie, I know.)

But I prefer to look for some similarities that have a leg to stand on. Let’s see what we find.

When Someone Yells, “Fire!”

In 1987, globalization was a relatively new concept. Interconnected international economics was uncharted territory.

After Black Monday, investors would learn just how connected our economies had become.

Just before the crisis, stock prices experienced a rapid appreciation from international investments.

Even the Federal Reserve partially attributes Black Monday to increased globalization and the snowball effect that started in Asia.

Before markets opened in the United States on Monday morning, traders had been up all night watching the Asian markets plummet and witnessing that impact spread worldwide.

The most extreme case occurred in New Zealand, where the market fell 60%.

Once the U.S. markets did open, traders were physically fighting their way to the pits to liquidate their positions. The DJIA crashed at the opening bell.

Does this situation sound familiar?

It should. It happened again just a few months ago.

A surprise devaluation of the Chinese yuan in August of this year caused a chain of events that has wiped out more than $5 trillion in global stock prices.

Chinese stocks closed down 8.5%, the single-worst fall in almost a decade. Japanese and European markets followed, down almost 5%.

In the U.S., the Dow opened down more than 1,000 points, and most of the major indices still linger down 4%.

The Chinese economy accounts for 15% of global GDP and more than half of global growth.

Today’s markets are much more closely connected than they were in 1987. Many U.S. traders have significant positions in foreign markets, and vice versa.

At this point, our economies are intrinsically linked. So we need to keep an eye on the Chinese government’s ability to manage their own market.

It’s unlikely that we’ll see a repeat of 1987, but the interconnectedness of global markets is still cause for concern.

Technological Hubris

The globalization of markets isn’t the only factor that has increased since 1987.

That phrase “the Internet of everything”? It rings true for investing as well, more so now than ever.

In 1987, computerized trading programs were gaining popularity, selling futures contracts to protect portfolios if and when the market was falling.

In 1987, program trading accounted for 10% of transactions at the NYSE.

Using algorithms set by trading companies, computers were able to rapidly buy and sell stocks.

So trading companies would set threshold prices. Once a stock reached that price, the computer would automatically sell.

Unfortunately, these algorithms were still relatively primitive.

Although they seemed groundbreaking for their time, they could not account for global hysteria, human psychology, or even just a tough day in the markets. (They still can’t, really.)

One finance expert puts it this way:

If a stock fell to $50, for instance, it might be programmed to sell. But the computer didn’t ask, ‘Should I sell?’

Although program trading was intended to protect investors, most experts agree that the rapid and high-volume mechanism actually contributed to the severity of the crash.

It seems we might have forgotten the lesson to be learned from 1987 — that computers are not an adequate replacement for human judgment.

Today, computerized trading is at its peak, operating in multiple markets at an unprecedented scale.

It sounds flawless, but accidents can happen.

In fact, we’ve already witnessed a few of these “flash crashes.”

In 2010, the Dow Jones fell more than 1,000 points, but then quickly recovered — all within 15 minutes. It was the biggest point drop to occur in a single day and one of the most volatile movements in the history of markets.

Even still, no one can explain why it happened.

One tech firm, Knight Capital, went nearly bankrupt in 2012 when one of its algorithms malfunctioned. In just 45 minutes, the company experienced almost $450 million in losses.

Because of robot trading, many investors have developed a “set it and forget it” attitude toward their holdings. This is never a wise strategy.

As we think about the anniversary of Black Monday and the role that computerized trading had in that debacle, we must also think about whether or not robot traders are truly dependable after all.

Keep Calm…

Back in 1987, we didn’t have the structure or regulation in place to handle a new kind of market activity that came with globalization.

We also didn’t have regulation for algorithmic trading. Technology has come a long way since, and regulation has been enacted to prevent outright manipulation of those computer programs.

The one thing that has not changed is the issue of human psychology.

It’s basic herd mentality: panic begets panic. The majority of investors who were rushing to sell in 1987 had no reason to do so, aside from the fact that everyone else around them was also selling.

That aside, our financial system today is significantly more sophisticated than it was in 1987.

Circuit breakers and other policies enacted in response to Black Monday will (hopefully) continue to reduce market volatility.

Should stocks begin to plummet too quickly, a system of halting mechanisms is in place.

Believe me — we’re not ignoring the events of 2008.

Other indicators also point away from another crash. Consumer debt is less, and regulation is more. Dodd-Frank has led to incredible oversight and restrictions for banks and companies that seem “too big to fail.”

Economic growth, although still at the slow pace of 2% to 2.5%, is a promising indicator as well.

This is not to suggest that it’s safe to become complacent. However, we do urge investors to break away from the herd, to not fall victim to the “October Effect,” and to consider the variety of factors before subscribing to unwarranted superstitions.

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