Originally published on Aug. 31, 2014
September. A month when thoughts turn to returning to school and the weather cools as investors and traders return from the beach. The relaxation of summer is quickly replaced by the feelings of anxiety. There are no months that strike fear and anxiety in the hearts of investors more than September and October. This year will be no different. The two worst performing months on the calendar are the aforementioned months. The reminder of September 11th for traders who were there only serves to heighten the anxiety felt. As you know we find the seasonality of markets to be a reliable source of alpha as human beings refuse to change their well worn patterns. From Arthur Cashin and Jason Goepfert comes some fresh research on where we stand on the upcoming seasonality and what next month may hold in store.
1. Volume on the NYSE has been well below average, which is not unusual for a pre-holiday week. When stocks hit new highs on below-average volume, they tend to under-perform a bit longer-term, relative to when they hit new highs on above-average volume.
2. If the S&P 500 closed August with a gain of 3% or more, then it added to its gains in September 36% of the time. If it also closed at a 12-month high in August, then September was positive only 1 out of 12 times, averaging -2.6%. If August closed with a gain of 1% or more, and a 12-month high, then September was positive only 3 out of 19 times, averaging -1.6%. All data since 1928. - Jason Goepfert Sundial Capital Research
As you know we have felt that the bond market still had legs in its rally in 2014. (2015 may be a different story.) Also by way of Arthur Cashin are the following notes from Barry Habib who has nailed the bond market and its course so far in 2014.
Here are some additional reasons to support a continuing decline in US yields. Foreign investors, especially those in Europe, will likely be attracted to investing in US Treasuries. Not just because of the obvious and wide spread between the US 10-year Note and German 10-year Bund. There is an added currency play which could greatly improve the returns. As QE3 comes to a close, we have already seen the Dollar strengthen against the Euro. This trend should continue as tapering is finalized. Adding to the Dollar strength against the Euro is the strengthening US economy against the sluggish Eurozone. - Barry Habib
Arthur goes on to mention that another reason to be long US Treasuries is because everyone else is seemingly on the other side of that trade and short US Treasuries. There is massive money short US Treasuries which is a bet that Treasuries will lose their value and have prices head lower. For most of 2014 that trade has been a loser. The thought being that with the Fed ready to start raising rates it would be a no-brainer that Treasuries would lose value. Not so much.
Keep your eyes on US Treasuries as any geopolitical rumblings or deflation in Europe may push more money into bonds. We will find out in the next two months how much the Federal Reserve's QE policy has held up stock prices. Those purchases are being eliminated in the next 60 days. This is where the rubber meets the road. It is ironic that the Fed policy is being withdrawn at the worst point seasonally for stocks. The anxiety level of investors for September and October will only be heightened. Gold keeps trying to break out but is being held back. As for stocks here is a note we sent to a friend this week.
Just for kicks - the high in 1987 was put in the day after Labor Day.
The chart I am watching is the Small CAP Reversal chart I attached below. It is a textbook reversal pattern. Having said that, nothing right now that is happening from a monetary perspective is in the textbook. Watch the Russell 2000 (NYSEARCA:IWM). If it closes below 108 it should go to 96 very quickly. That is a 17% drop from current levels. Large caps will not fall by as much but it could change the trend of the market and that could last for months.
Now the good part. No problems. Only opportunities. Take a look at the 2nd chart - Dow Jones Bull Bear Cycles. The last two Bear cycles lasted 17 & 18 years. We are 14 years into the current Bear Cycle. Take a look at the 1970's bear cycle. I expect much the same to happen here. The last major move down is expected by investors and therefore should be much shallower than the previous moves in the Bear Cycle. Investors are prepared this time. (The old - they are not going to get me again!) Granted monetary policy is a bit experimental and anything can happen. I just think a major dip this late into a Bear Cycle will need to be bought.
Hope this helps. If you can keep your head while…
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what's happening because you thought through all the possibilities - Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. - Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone's financial situation is different. Consult your financial advisor.