Black Monday? Sell Today as August Goes Away

Will there be a sudden plunge on financial markets on Monday as the month of August comes to a close? Markets do seem to be riding for a fall.

Certainly a bout of end of month profit taking can be anticipated after a record rally from the lows of March. It would not take much more logic to conclude that this long rally is also coming to an end and that a renewed plunge in markets is inevitable.

One thing we know for certain about stock markets is that they do not move upwards in a straight line. Therefore after a long run up in prices you can anticipate at the very least a correction of 10-20 per cent.

But these are not normal times. Developed markets are locked in the worst recession in two generations and any ‘recovery’ now evident is more by way of a bottoming out than anything stronger.

Recent trade data is not encouraging. Japanese exports to the US are down 38 per cent. Chinese exports are running 25 per cent down. The Baltic Shipping Index has tumbled again over the past 11 weeks, an ominous repeat of last summer’s collapse.

Stock markets are pricing in a strong recovery that not only looks unlikely, but clearly just is not happening. The Shanghai market has been down up to 20 per cent over the past few weeks. Is this the beginning of a global trend?

It looks very obvious, so much so that I think short positions are advisable. To stay long in stocks and not to hedge at such a time is surely foolish.

September is also a traditionally weak month for stock markets. The worst ever collapse was in September 1931 when the US market fell 30 per cent.

There is the old adage attributed to Keynes that markets can stay irrational longer than the players can stay solvent. But behaving irrationally is also likely to leave you insolvent, and holding long positions after a rally is over makes no sense.

Look at it another way: how much more upside could there be in financial markets versus the downside risk of staying exposed? So sell on Monday!

Comments

[Dave Wrixon:]

Well cannot argue with that, but I was impressed by the figures showing the drop on imports. Are American's really buying American or are the GDP figures bunk. With imports down drastically, and most of the economy structured to retail imported goods are Uncle Sam's GDP figures really credible?

As for timing, well that will happen when the lies are no longer plausible. Couldn't put an exact time on the unveiling of the Emperor's New Cloths. But you do kind of have a sixth sense that something is imminent. The problem I have is that really the fate of Stock Market is going to be determined by Monetary Policy going forward. Will Ben just keep printing until we all run out of trees or will he flinch when the dollar starts to buckle. It will be high interest rates that kill the Stock Market, but if everyone is happy to kiss the dollar's arse goodbye then it could go up indefinitely, if we are counting in ever worthless currency units. Not sure that actually makes it a good investment though.

Aug 31 05:24 AM

[JD of OZ:]

Couldn't agree more Peter. There are dozens of reasons to sell when comparing this market to historical precedents and only one to keep buying - stupidity.

Aug 31 05:40 AM

[Michael Clark:]

China's stock market is in a free-fall. Western indexes are not showing cracks yet -- but we know they should. This is a phony rally that is being funded by taxpayer money to convince us that everything is fine. It's not fine, of course. Most of us know that.

I think Cramer and his ilk should be required to wear cheer-leading uniforms that have either NYSE or NASDAQ on the sweaters, as they teams they are playing for.

Aug 31 06:07 AM

[Trex:]

Let's have some or should we say FULL disclosure. This kind of reporting without it should not be allowed.

Aug 31 06:56 AM

[tobi:]

China is going down and is back to where it was in May and the speed at which this is happening suggests that our old friend Mr. panic, who we thought died in March, is back from rehab. It's not all gloom, doom and March lows, but it's a time to reduce equity exposure and stay away from the market and be very cautious until signs of recovery are more clear to read. Nobody knows the direction of the market, but I claim that the risk reward sheme is negative currently and does not justify buying in at the moment.

Aug 31 08:01 AM

[David Van K...:]

Other than the trade data (which I assume the author got right) and the comment about September, I didn't detect a single actual fact in this article...just opinons and unsupported conclusions. You may agree with the conclusions, but for people who want to think on their own and reach reasoned decisions, this article is not helpful at all. It's a rant.

Aug 31 09:42 AM

[Doom Blogge...:]

This just might be the dumbest Seeking Alpha bear post I have ever seen.

Jealous much? Missed out since March. I think so. To call this rally irrational is irrational in itself. The pullbacks have corrected any overbought conditions along the way. Notice June as a sort of basing month?

Dribble. And I see the fellow bear lemmings follow here

Aug 31 10:04 AM

[Mad Hedge F...:]

I have successfully avoided bears of a different sort this summer, those of the stock market kind (see my July 15 warning not to sell to soon by clicking here at www.madhedgefundtrader...). Never have I seen such a disconnect between the markets and the real economy. All of a sudden the world has gotten expensive. Stock prices have been levitated by vapor. The bulk of the trading volume is now accounted for by worthless zombie stocks like Citibank (C), (AIG), Fannie Mae (FNM), and Freddie Mac (FRE). Cost cutting, not sales growth, has artificially boosted earnings above subterranean forecasts. Commodity prices have soared because of stockpiling and not consumption. Puzzled CEO’s of every stripe are seeing no recovery in their businesses whatsoever. But bears who have sold into the summer rally have gotten a severe spanking. We are left with momentum players and chartists to grind out ever diminishing returns. I have used the big up days to sell short dated out of the money calls in small size which, mercifully, expired worthless, sometimes just by pennies. That’s because I keep my favorite quote from John Maynard Keynes pasted to my monitor; “Markets can remain irrational longer than you can remain liquid.” Better to wait for a more convincing break on the charts before piling on those shorts again.

Aug 31 10:05 AM

[Graham and ...:]

Shakespeare put it differently: "Better three hours too early than one minute too late " For selling.

Aug 31 10:58 AM

[PseudonymName:]

Agree, agree, agree. The only problem is my market timing system is giving me a buy signal today! Read about it here:

seekingalpha.com/insta...

Aug 31 11:27 AM

[Fabien Hug:]

We can add to Mad Hedge F....; insider selling at its highest (as per what I read...) and short interest at its lowest (about 6% for the most heavily shorted stocks). And I fully agree that everything is expensive.
But, beware the FED and its friends...

Aug 31 12:11 PM

[William M. ...:]

50 point down day is very disappointing for a BLACK MONDAY. The odds favor the forecaster who proclaims this maybe a RED SEPTEMBER. Even the Bulls are expecting a pull-back. And it seems everyone is now selling into every GREEN SHOOT pop so it's safe to say with Bulls no longer buying and momentum players leaving the poker tables stocks if a economic indicator disappoints then yes, a 5-10% pull back is possible but you didn't provide any compelling facts, as David, said to expect a 20% drop other then in Sept 1931 the market declined 30%.

Keynes also said:

The avoidance of taxes is the only intellectual pursuit that carries any reward. ------John Maynard Keynes

Aug 31 10:09 PM

[thiazole:]

I agree. We could very easily see a 5-10% pull back somewhere in the Sept-Oct timeframe. Anyone expecting more than that will likely be very disappointed. It is very likely, though, that the year will close with the markets quite a bit higher than they are today.


On Aug 31 10:09 PM William M. Wright wrote:

> 50 point down day is very disappointing for a BLACK MONDAY. The odds
> favor the forecaster who proclaims this maybe a RED SEPTEMBER. Even
> the Bulls are expecting a pull-back. And it seems everyone is now
> selling into every GREEN SHOOT pop so it's safe to say with Bulls
> no longer buying and momentum players leaving the poker tables stocks
> if a economic indicator disappoints then yes, a 5-10% pull back is
> possible but you didn't provide any compelling facts, as David, said
> to expect a 20% drop other then in Sept 1931 the market declined
> 30%.
>
> Keynes also said:
>
> The avoidance of taxes is the only intellectual pursuit that carries
> any reward. ------John Maynard Keynes

Sep 01 12:04 PM

[Peter Cooper:]

Markets seem to be behaving more rationally today. Shakespeare said in one of his plays that it was better to sell three months too early than one minute too late. I think that would have left him short. Don't lose your shirt!

Sep 01 01:37 PM

[Spartacuss:]

But if we go with the momentum and the technicals there just will be no end to up especially with the FED and government pushing on the go-go pedals and Wall St. hyping and the big banks finangling...so why fight it?

Just because the Japanese and Chinese are not shipping and the Baltic Dry Index keeps falling and commercial loans are defaulting like crazy and further mortgage problems and continued unemployment and more and more banks failing, wages falling and baby boomers retiring with nothing and profits are only due to whatever cost cutting and other finanglings, what's to worry about?

Certainly I wouln't worry about the trillions of derivatives that have to be deleveraged and I wouldn't worry about FDIC going broke and I wouln't even give a thought to all the spending of public money on trash that doesn't do a thing for the economy. None of these things matter, so don't worry about it, be happy and have faith all will be roses and cream and freebies at the government candy store.

Sep 01 07:11 PM