3 Reasons Why a September Stock Sell-Off Isn't Likely

By Mike Conlon

Historically speaking, the month of September has been the worst month for U.S. stock market performance. This has commonly become known as the “September Effect”. In the same vein as “sell in May, go away”, the September Effect has had impact on market psychology and can create a negative bias for market participants.

Under “normal” (non-government intervention) market conditions, the stock market rally that has gone on since March would indicate a strong uptrend in growth yet there is a greater sense of fear that this trend may be fleeting and that a major reversal could occur. While it is apparent that the government economic stimulus plans cannot go on forever, will the market really sell off as some people are predicting?

Judging by the chart of the S&P 500 ETF (SPY) below, the trend has been decidedly up since the March lows. That rally has left many investors behind as their fear over the uncertainty of the health of the economy caused them to stay on the sidelines for much of the move upward.

Click to enlarge:

This brings me to the first reason why a stock market sell-off isn’t likely: fund manager performance anxiety. Many managers have missed some of the gains that the market has made and have had to deviate from normal behavior in order to participate. While the fundamentals haven’t been very good, it is still difficult to explain that to your investors in the face of 50% returns. Especially after showing negative returns in 2008. So if a manager hasn’t participated in the rally, or is waiting for a pullback that may never come, he’d better get in now. After all, he is probably toast anyway so why not try to get in and hope to get lucky?

Secondly, the reliability of economic data has changed the landscape for investing, perhaps permanently. The new paradigm of “less bad=good” leaves a lot of room for interpretation. Given the fact that the government needs to show improving numbers in order to keep the economy stable, does anyone doubt the numbers won’t be somewhat positive going forward? Can anyone truly believe these numbers anyway? Barring some major catastrophe in the employment figures, I can’t see anything out there that would take us off course.

Lastly, there just isn’t anywhere else to put your money. Interest rates are ridiculously low and will remain that way until inflation starts to pick up. When that will be is anyone’s guess as this relates to the second point about the believability of government figures. So if the Fed is banking on inflation, you should too. Bonds, money markets, and other fixed income vehicles are out. Stocks and commodities are in.

As you can see, sometimes trying to grasp all of the reasons why a market may be moving can be a fool’s folly. When factors other than actual economic performance affect a market, sometimes it’s just better to jump on board and hope for the best. But be certain to use proven risk management techniques to protect yourself from losses.

Original article

Disclosure: The author may have a position in the securities mentioned in this article.

Comments

[Bling Daddy:]

To play Devil's Advocate:

1. Fund manager's anxiety. How about all the "other" fund managers that have rode the wave and are becoming leery of the consensus likely-hood of a correction and are therefore reallocating to alternative investment vehicles or cash? Do you think the market "cares" if anxious managers get crushed by buying high?

2. Spin on data can only work for so long. "things are less bad" means very little when you just lost your job, your home, and your hope for a brighter tomorrow. When we lose another 1/4 (?) million jobs this month, people will know that is a bad sign, even if "less bad" than before.

3. There are always other places to put your money. That is a ridiculous statement.

Although I agree with you that "sometimes trying to grasp all of the reasons why a market may be moving can be a fool’s folly," I think that just "jumping on board" is advice that could lose a lot of people a lot of money. This market is craving a reality check, that's why this debate is happening. It is a self-fulfilling prophecy. The real question is: how big will the sell-off ultimately be?

Sep 02 05:07 AM

[Roger Knights:]

'Tember!

Sep 02 05:11 AM

[tobi:]

Where from do you think fund managers have not participated in this rally ? This is the tale a lot of mainstream media spins to cheer prices higher, I have not yet seen an indactor that that may be true, in fact bulishness is at a high, which suggests to me that there are a lot of invested people in danger of being disappointed compared to little bears left to throw in the towel and buy. Buying because of the anxiety of being left out is always a bad decision, there has never been a lot of money made being fearful.

Sep 02 07:05 AM

[damienhaas:]

"the reliability of economic data has changed the landscape for investing, perhaps permanently".

Again another "permanent" new paradigm in investing, in this case the market will never fall as there is always new paradigm.

There is always other investment opportunities like high grade corporate Bond(much more under value), gold and commodities(which are limit supply). These are better alternative than the overvalue stock market now.

Sep 02 07:27 AM

[perceptions...:]

"While the fundamentals haven’t been very good, it is still difficult to explain that to your investors in the face of 50% returns."

That can not be allowed to stand and it requires two basic corrections.

The 50% returns referred to, is the bounce since March lows, but prior to that investors had already taken a 50% hit, as share values went lower. And, now, shares are falling back to retest those March lows.

Second, your assertion that the "fundamentals haven’t been very good", is an absolute understatement, as the real position is -
1) The Debt to GDP ratio is heading north quickly, to 100% and beyond.
2) Consumers have taken a massive hit, via falling housing equity, lower share values & reduced access to credit.
3) The economy is deleveraging and will do so, for some time to come. Derivatives is the other Elephant in the living room!
4) Two of the three major growth drivers (Oil & Population), have Peaked and are heading south.
5) Unemployment and Taxes are both rising.
6) Business Earnings are falling dramatically and bankruptcies are rising.
7) Tax revenues and consumption are both down.
8) Massive increases in Health and Social Security Costs, are on the way, again expanding government deficits.
9) Problems arising from Climate Change and Food Production are also set to interfere with future plans.
10) Share Markets first fell some 50% and have since increased some 50%, still leaving a massive reduction in total wealth.

Next, I scratch my head at your statement that the reliability of economic data has changed the landscape, followed by " Barring some major catastrophe in the employment figures, I can’t see anything out there that would take us off course".
In fact, the only thing that could be conceiveably accepted with the government stats, is that it is "Full of Spin"!

Lastly, you say, "there just isn’t anywhere else to put your money".
I would suggest a Mark Twain quote is at this point, that is good advice!
"I am more concerned with the return of my money
than the return on my money"

Sep 02 08:32 AM

[John Galt:]

1) Goldman Sachs HAS participated in the rally. The fact that Joe Blow the fund manager hasn't isn't as relevant, he'll be teaching finance at turnpike tech in two years anyway.

2) You can't keep getting less bad and expect a bull market. At some point you need growth and the market has already priced this growth in with a tremendous rally. You be thinking 2-3 chess moves into the future because the market already has expectations for the next move.

3) What was the mantra of your parents/grandparents who lived through the great depression? " CASH IS KING". They were told all the same things you are being told about "green shoots" and "stimulus plan", it's just they were named " New Deal and New New Deal after the first one failed". They saw the German Weinmar republic blow up and the wheel barrels of money. They were lied to by their government and leadership and what did they come out saying in the end, " Cash is king". I'm not saying that Cash is the answer this time as we do have the 800 pound inflation monster in the room, but it's happened before.

Sep 02 08:56 AM

[TCK:]

The recent market moves has been largely driven by media cheer leading. When Bush was in office the unemployment rate was 6% and we were told it was Great Depression 2.

Under Obama the unemployment is 10 % and we are told the recovery is at hand.

Think about it !

Sep 02 10:14 AM

[finance con...:]

The "devil's advocate seems like a logical thinking person. The authors are idiots and they are the sort of people that have caused many to lose their life savings. These are the guys that the proverb " a fool and his money are soon parted" was written for.


On Sep 02 05:07 AM Bling Daddy wrote:

> To play Devil's Advocate:
>
> 1. Fund manager's anxiety. How about all the "other" fund managers
> that have rode the wave and are becoming leery of the consensus likely-hood
> of a correction and are therefore reallocating to alternative investment
> vehicles or cash? Do you think the market "cares" if anxious managers
> get crushed by buying high?
>
> 2. Spin on data can only work for so long. "things are less bad"
> means very little when you just lost your job, your home, and your
> hope for a brighter tomorrow. When we lose another 1/4 (?) million
> jobs this month, people will know that is a bad sign, even if "less
> bad" than before.
>
> 3. There are always other places to put your money. That is a ridiculous
> statement.
>
> Although I agree with you that "sometimes trying to grasp all of
> the reasons why a market may be moving can be a fool’s folly," I
> think that just "jumping on board" is advice that could lose a lot
> of people a lot of money. This market is craving a reality check,
> that's why this debate is happening. It is a self-fulfilling prophecy.
> The real question is: how big will the sell-off ultimately be?

Sep 02 04:33 PM

[finance con...:]

you had me until the glogal warming bit. Yikes man get a drug test. it is the perception of the problem (climate change) and the "cure" cap and trade (cap and tax) that will create the economic sunami. The climate change bit is pure hype meant to make a select group of elites even richer at the expense of the masses. There is no scientific evidence to back the goring fantasy.


On Sep 02 08:32 AM perceptions_now wrote:

> "While the fundamentals haven’t been very good, it is still difficult
> to explain that to your investors in the face of 50% returns."<br/>
>
> That can not be allowed to stand and it requires two basic corrections.
>
>
> The 50% returns referred to, is the bounce since March lows, but
> prior to that investors had already taken a 50% hit, as share values
> went lower. And, now, shares are falling back to retest those March
> lows.
>
> Second, your assertion that the "fundamentals haven’t been very good",
> is an absolute understatement, as the real position is -
> 1) The Debt to GDP ratio is heading north quickly, to 100% and beyond.
>
> 2) Consumers have taken a massive hit, via falling housing equity,
> lower share values &amp; reduced access to credit.
> 3) The economy is deleveraging and will do so, for some time to come.
> Derivatives is the other Elephant in the living room!
> 4) Two of the three major growth drivers (Oil &amp; Population),
> have Peaked and are heading south.
> 5) Unemployment and Taxes are both rising.
> 6) Business Earnings are falling dramatically and bankruptcies are
> rising.
> 7) Tax revenues and consumption are both down.
> 8) Massive increases in Health and Social Security Costs, are on
> the way, again expanding government deficits.
> 9) Problems arising from Climate Change and Food Production are also
> set to interfere with future plans.
> 10) Share Markets first fell some 50% and have since increased some
> 50%, still leaving a massive reduction in total wealth.
>
> Next, I scratch my head at your statement that the reliability of
> economic data has changed the landscape, followed by " Barring some
> major catastrophe in the employment figures, I can’t see anything
> out there that would take us off course".
> In fact, the only thing that could be conceiveably accepted with
> the government stats, is that it is "Full of Spin"!
>
> Lastly, you say, "there just isn’t anywhere else to put your money".
>
> I would suggest a Mark Twain quote is at this point, that is good
> advice!
> "I am more concerned with the return of my money
> than the return on my money"
>
>
>
>
>

Sep 02 04:40 PM

[Albertarocks:]

Great article but in all due respect, I don't think any of the 3 reasons you detailed have diddly squat to do with the markets, for the good reasons given by Bling Daddy at the very top of this comments page.

But instead, I'm suspicious that because we're seeing the fact that "Septembers are normally a dark month for the markets" pasted all over the news, blogs, media and constantly parroted by the spinsters... I think they're setting us up with a minor correction here and then they'll go on another cycle of madness.

They've got so much stolen money to play with that they can ignite rallies anytime they want to. The bastards think they can use a cigarette lighter to launch the Space Shuttle. They're playing with fire and they know it... but perhaps the world is onto them. The longer this insanity goes, the more people are waking up. And that makes for a tinderbox. Let's see what September brings, because they "might" have this one last trick up their greasy sleeve... if they can get away with it.

Sep 02 06:22 PM

[Mike Conlon:]

Aww it looks like I've made a friend. Two comments on your profile and both on my article. I'm sorry to say friend that I'm already married.

Ad hominem attacks aside, I don't disagree with Bling Daddy's comments either. All I am saying is that with all of the manipulation going on in the equity markets, it is really difficult to use the "fundamentals" as a guide to your investing or trading. "The markets can remain irrational longer than you can remain solvent."

This falls in line with Albertarock's comments-- when everyone is bearish I want to be bullish, and vice-versa. Its called contrarian investing.

Take a look back at the Internet Boom, if you were a pure fundamental investor, you would have missed the entire rally as the multiples for the dotcom stocks were ridiculous as most companies had no earnings. If you did ride the wave up AND knew nothing about risk management you probably lost all of your gains on the way down as well.

My point simply is that with proper risk management techniques, you can buy stocks in any market.

Carry on.


On Sep 02 04:33 PM finance consultant wrote:

> The "devil's advocate seems like a logical thinking person. The
> authors are idiots and they are the sort of people that have caused
> many to lose their life savings. These are the guys that the proverb
> " a fool and his money are soon parted" was written for.

Sep 03 09:31 AM