Seeking Alpha

Stock Market September Warning

by: Markos Kaminis
Markos Kaminis
Long/short equity, special situations, growth at reasonable price, Deep Value

The geopolitical factor, North Korea, is worthy now of tangible status as a weight against equities.

The season, at least through September, is in my perception structurally problematic for risk taking.

Several other catalysts, including the debt ceiling, government shutdown, Fed policy, even the weather, or the unforeseen could all catalyze a market correction under current conditions.

So, despite my admiration of global economic recovery and my expectation for later equity gains, I would protect wealth over the short short-term.

A constructive jobs report last Friday, in that it seemed to keep the Fed at-bay while still showing a healthy economy, is quickly overshadowed this week by the rise to tangible status of a previously intangible factor. The threat of a North Korea event catalyst has gained weight after a significant nuclear test over the weekend, and a series of statements and line-drawing by the United States thereafter. But the real problem now is seasonal, and relative structural weakness I perceive in the market. Several potential catalysts could set off a stock market correction during this period, and many are in play in September.

Security 09-01-17 Close
SPDR S&P 500 (NYSE: SPY) +0.1%
SPDR Dow Jones (NYSE: DIA) +0.2%
PowerShares QQQ (NASDAQ: QQQ) -0.1%
iShares Russell 2000 (NYSE: IWM) +0.5%
Vanguard Total Stock Market (NYSE: VTI) +0.2%
iPath S&P 500 VIX (NYSE: VXX) -0.2%
PowerShares DB US Dollar Bull (NYSE: UUP) +0.2%
PIMCO Active Bond (NYSE: BOND) -0.1%
United States Oil (NYSE: USO) +0.4%
SPDR Gold Trust (NYSE: GLD) +0.2%

Equity index futures were lower and safe havens were higher on Labor Day, as the stock market and investors rested in the United States. Equities overseas were lower in Europe and Asia on a serious geopolitical catalyst over the weekend. Into Tuesday morning and the start of the week for U.S. investors, stocks were only indicating a slightly lower open.

Now a Tangible Factor

North Korea tested a nuclear weapon capable of wiping out an American city this past weekend. Given its recent provocations via the testing of intercontinental ballistic missiles, and the market-perceived unpredictability of both the leaders of North Korea and the United States, risk premia are rising.

Statements of the U.S. Defense Secretary seem to imply that a significant provocation upon Guam or threat to our allies, like the missile that flew over Japan last week, could trigger a massive U.S. military response. Given that anything seems possible from either side, like a missile test toward Guam, a conclusive U.S. response and an uncertain response from China and North Korea, risk could and should come off this week or soon.

Still, investors are a greedy breed, and the latest economic data offers reason to believe in equities if we can look past the possibility of a horribly devastating war. It seems that is what many investors are attempting to do today, given relatively positive premarket activity at the early 4:00 AM EDT hour.

The Positioning Restated

Last week, I expressed caution about the current season despite positive economic indications. Today, I'm suggesting investors begin raising cash levels and reducing risk in preparation for a possible market correction. These latest geopolitical events only intensify my concern and strengthen my confidence in my near-term market view (September).

The current period is one of high concern because of its historical weakness on what I perceive as a seasonal structural problem for securities markets. I believe that because of the fiscal calendar year-end of many institutional funds around this time of year, portfolio managers are especially sensitive to performance protection.

Thus, any catalyst could trigger a market correction during these late summer/ early fall months. The tensions relative to North Korea; the Fed inflection point regarding its balance sheet and other policy influences; debt ceiling and government shutdown posturing; and even the weather are potent enough to cause a cascade for stocks. Certainly, something unexpected could be overreacted to, and cause a significant shift in capital.

Thus, I would take risk off now, raise cash levels for potential future purchases at discount, and consider hedging against risk as well via volatility instruments (NYSE: VXX) and, because of the geopolitical factor in play and other threats to the U.S. dollar, precious metals (NYSE: GLD) as well now.

Looking Ahead

If not for these significant current concerns, I would be enthused about equities and risk assets. In fact, my positive outlook for the global economy for the second half of 2017 and full 2018 should have me recommending equities later this year.

Last week's Employment Situation Report for August, though disappointing against economists' forecasts, still reflected a healthy U.S. economy. And other recent data, including the upward revision to second quarter GDP, further strengthens confidence.

In conclusion, though, we will need to see a positive step toward a non-military resolution to current North Korea tensions. Even so, because of the seasonal structural problems I perceive now, other catalysts in play are also potent enough to hurt wealth stores. Thus, for the near-term, despite my positive economic perspective, I'm suggesting investors raise cash, take risk off and hedge against risk via volatility and precious metals. For more of my work on markets, readers are welcomed to follow the column here at Seeking Alpha.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.