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Mark Hulbert’s Take: What Are the Odds of a September Decline?

|Includes:BWZ, MINT, RWM, ProShares Short S&P 500 ETF (SH), TIP, VXX, VXZ, WIP

Some of the work Mark Hulbert does is nothing more than telling us what the gurus in the universe he follows are thinking individually and, more frequently, in the aggregate.  But of late, he also has been doing some far more interesting analysis in the “Yale Hirsch” mode – and the results are not satisfying if you are a bull.

The bullish case seems to rest on two platforms: (1) August was really bad therefore September should be good in reaction to that, and (2) “Everyone” now expects the current crop of politicos to suffer major setbacks in November and, since the market is a predictive mechanism, investors are positioning themselves today for what they believe will be wonderful news post-November (like an extension of the current tax rates and a reduction in pork-barrel spending by irresponsible pols.)

The Dow rallied more than 300 points the first two days of September so, making the usual straight-line assumption, bulls believe that today is the day to get invested,  Hmmm.  Let’s examine each of the above platforms in turn.

Quoting Mr. Hulbert’s conclusions based upon his historical analysis:

“I have good news and bad news when it comes to slicing and dicing the historical data as it pertains to September.

“The good news is that it is possible, by carefully reading the statistical tea leaves, to get advance insight into whether any given month is likely to do better or worse than average.

“The bad news: Those tea leaves provide no such hope that this September will be able to beat its historical reputation as being awful for stocks.”

His research shows that since 1896 (the year the Dow Jones Industrial Average was created,) the Dow has lost an average of 1.15% in September. The average gain for all other months was 0.71%.  Worse, a look at the historical record shows that Septembers did not show a 1.15% decline following a bad August – they showed a 2.7% decline!   Typically, when August is down, as goes August, so goes September -- only twice as bad as usual.

Worse than that, Hulbert notes, “During each of the past nine decades... September's rank relative to other months in terms of performance was never higher than ninth. It was dead last in five of those nine decades -- including the most recent one.”

He adds a final bit of gasoline to this bonfire by noting that the CBOE's Volatility Index (VIX) is relatively low going into September, the month tends to do better.  Uh-oh.  The VIX at the end of August was quite a bit higher than 20.   (And for those who have followed our comments on the VXX and VXZ ETFs in the past, we believe they have now entered an excellent buy area.)

As for the second platform, the market seldom reacts favorably to the same news twice.  I’ve been writing for two years that the pendulum will swing, that the 2008 election was a rejection of the guns-and-butter policy of the previous administration and was little different than the voters’ rejection of President Johnson’s guns and butter policies in 1968 (thrusting Richard Nixon into office with disastrous consequences we hope are not repeated this time around), and that mid-term elections are almost always about mitigating the euphoria of the previous presidential election.  This is not news!

The rally of September 1st and 2nd may have occurred as a result of Johnny-come-latelies reaching the conclusion Wall Street reached about the mid-term elections weeks or months ago.  If that is the case, I imagine the smart money is rubbing their hands with glee and using this rally to lay on bigger short positions. 

The current rally was ostensibly about the fact that the Chinese Purchasing Managers Index rose to 51.7 in August from 51.2 in July, followed by the news that the U.S ISM Manufacturing Index improved from 55.5 in July to 56.3 in August.  I don't see it – these incremental numbers are nothing but decimal dust in the grand scheme of things!  Easily manipulated by the bureaucrats in charge of such numbers, the “improvement” is so small as to be barely measurable – and to raise not a stir among the media when they are “revised” from “up 0.5%” to “down 0.1%” or whatever in another month.

The other economic numbers that form the backdrop to this rally include: Canada’s GDP fell to an annual rate of 2% in the 2nd quarter, down from 5.8% in Q1; auto sales absolutely plunged in the U.S. and around the world;there was a continued drop in U.S. construction spending; there were declining retail sales in Euro nations; and the ADP employment report indicating that we didn’t just grow jobs at too slow a pace to cover all the new workers entering the labor force, but we actually lost some 10,000 private sector jobs!  Government is still hiring, of course, but  we must always remember: the private sector is income, government is overhead.  That doesn’t mean we don’t need certain government workers – what hellish existence would it be without fire and police protection, or good teachers to educate our children?  But it is still overhead even if we collectively choose to pay for it in order to enhance our safety or literacy.

Bottom line: September tends to do worse in years that August has been bad.  August was bad.  The news of the mid-term elections is already old news and will most likely follow the historical path of all mid-term elections.  We will return more to the center.  And the good news to propel the market higher is likely to be short-lived.  Clearly, we aren’t out of the woods yet. If the market is in a news-dominated phase, we are likely in big trouble.

For our clients we are stressing safety, with inverse ETF protection from the likes of SH, RWM, QID and EUM.  (If the US and Europe aren’t consuming, who is going to order stuff from the emerging nations?  They will fall if our markets and economies fall…)  We are also buying VXX and VXZ and are keeping our bond positions short and inflation-resistant, as we do with WIP, TIP, BWZ, and MINT.  Finally, we own some special situations in precious metals, energy and agriculture.  (See previous articles for specifics…)


Author's Disclosure: We and those clients for whom it is appropriate own SH, RWM, QID EUM, VXX, VXZ, WIP, TIP, BWZ, and MINT as well as the previously-articulated special situations in precious metals, energy and agriculture.



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