Friday, August 14, 2009

Should You Brace for the September Effect?

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August 14, 2009  

How could one month have so many bad numbers? September in the stock market has spelled disaster again and again.

A dissertation by a doctoral student at Georgia Tech included a section that looked at 18 different stock markets in developed countries. He found that over a 200 year period, 15 out of 18 have shown negative returns in September. From 1970 to 2007, all 18 have posted negative returns.

The last bear market for U.S. stocks began in September of 2000. That market hit its lows in September of 2002. The Lehman Brothers collapse happened in September. The crash of 1987 happened in October, but the decline began in September. And the worst month of the great depression? September 1931, when the market fell 30%.

Will the seasonal slump play out again this year? We have no crystal ball. But after a 50% run in just a few months time and September / October around the corner, you should be asking yourself, do I really want to be fully exposed to the market right now?

So is now the time to sell?

No one – not even the best traders – can consistently time the market with precision. And by trying to time the market you have to be right twice. Getting out at the right time is only half the battle. If you don't get back in at the right time you can miss a big move to the upside.

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Market Window

Our best advice comes courtesy of Warren Buffett: be fearful when others are greedy and greedy when others are fearful. And sentiment suggests that investors are feeling greedy again…

This week's Investors Intelligence data shows that the percentage of investors who consider themselves bullish (near 50%) is more than twice the percentage of investors who call themselves bearish (just over 20%).

The market is technically overbought. Sentiment is overly optimistic. As we pointed out yesterday, corporate insiders are selling at the fastest pace since the bear market began. And we are about to enter what historically has been the worst month of the year for stocks.

There could still be strong upside ahead, but proceed with caution. Tighten your trailing stops. Prune your most speculative positions. Upgrade your portfolio to higher quality names. And consider reallocating a portion of your equities to investment grade corporate bonds.

Bonds haven't been this popular since the bear market of 2000-2003 and you need to look no further than bond ETFs for proof.

In just the first six months of this year the iShares iBoxx Investment Grade Corporate Bond Fund (LQD) attracted $5 billion in new money. The fund's total assets are only $12.7 billion – so this was a huge increase.

Junk bond ETFs have seen the same kind of inflow. According to a spokesperson for iShares, interest in the company's High Yield Corporate Bond Fund (HYG) has exploded.

It's been said that bonds are good for one thing: getting out of jail. "Not true," says Steve McDonald, IDE's bond expert. Steve says that due to the stock market collapse over the last year, many investors have finally developed a taste for the predictability and safety of bonds – and for good reason.

We will have published Steve McDonald's service, The Bond Trader, for one year in September. During that time – the most brutal year in modern stock market history – Steve has made more than 60 recommendations.

Of those, Steve has had to close only one position at a loss… CIT Group. He recommended the bond at 73 ($730). And the closeout recommendation went out at 64 ($640). That would equate to a loss of less than 13%.

That's one small loss during the harshest market environment in many decades. Only five of his recommendations are below the original buy price (just slightly). The rest have open gains. And he has closed out numerous double-digit profits, including fast gains of 62%... 47%... and 22%.

There are few better ways to make safe and substantial profits than by investing in high-quality corporate bonds, selling at a discount. If you would like to make stock market returns, without taking stock market risk, you must consider high-grade corporate bonds. Learn more about the Bond Trader here.

The loss Steve is taking on bonds issued by CIT Group pales by comparison to the stockholders of CIT.

The company is likely to declare bankruptcy. Shareholders have been decimated. And yet, Steve's subscribers will take about a 13% haircut.

That's the safety of bonds.

The textbook definition of a recession is two consecutive quarters of negative economic growth. That means France and Germany are "officially" out of recession.

The two European countries both reported second quarter GDP growth of 0.3%. This raises hope for the entire European Union, although we doubt the pain is over.

Economists say that government stimulus programs deserve most of the credit. But you know how ludicrous that is. Governments don't create wealth. They destroy it. Or at the very least, they redistribute it.

In this case, the wealth is being redistributed from the public sector to the private one, in the form of taxpayer bailouts and stimulus programs. And it is being redistributed from future generations to our own, in the form of an inflated currency and massive and immoral generational debts.

The Wall Street Journal reports that over 50 business economists expect positive growth in the U.S. in the second half of 2009 and in 2010.

The consensus is that GDP will increase at an annual rate of 2.2% in the current third quarter. The U.S. GDP was negative 6.4% in the first quarter and down 1% in the second quarter. How did the economy "improve" so much? Trade. Our imports fell faster than our exports.

And certainly the massive taxpayer-funded stimulus and trillions of dollars pumped into system by the Federal Reserve have had their impact as well.

By definition, a positive reading for this quarter would mark an end to the current recession. But be careful what you wish for. This would be an artificial recovery at best. And the inflationary side-effects could be catastrophic.

And speaking of monetary side-effects, gold is holding strong over $950…

It's only a matter of time before the yellow metal takes out the psychologically important $1,000 again. And this time, after nearly 20 months of sideways consolidation, the break over $1,000 is likely to hold.

September might be one of the worst months for stocks, but historically it is a very strong month for gold. Use the "September Effect" to your advantage. Lighten up on stocks and be sure your wealth is protected with the Midas metal.

Good Investing,

Bob Irish
Investment Director
Investor's Daily Edge

Bob Irish - Investment Director
Andy Gordon - Editorial Contributor
Jon Herring - Editorial Director
Ted Peroulakis - Editorial Contributor
Christian Hill - Managing Editor
Dr. Russell McDougal - Editorial Contributor
Steve McDonald - Editorial Contributor
Michael Masterson - Editor Emeritus


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