September 1 , 2009 |  | Vol. 4, No. 33 |  |  |
Fellow Investor,
A Peculiarly Dangerous Month
"October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February."
--Mark Twain
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Click here to find out more. | | Even as the U.S. and European stock markets hit 10-month highs in August, many large investors have been betting on a big correction in the autumn. David Einhorn of Greenlight Capital, a multi-billion dollar hedge fund, has invested 25% of his fund into S&P 500 puts, an outsized bet on a drop in the U.S. stock market. And he's not alone. The put/call ratio on the S&P 500 has soared over the past few weeks. September futures on the VIX, a measure of expected volatility based on options on the S&P 500, have also jumped.
How you handle a potential market swoon in the next month or so may make the difference between having a great year in the stock market, or merely a good one.
A Peculiarly Dangerous Month: A Grim History
October has a particularly bad reputation among investors as a bad month for stocks. Yet, Mark Twain's famous quip notwithstanding, September is the month that has cost investors the most money over time.
The Wall Street Journal recently highlighted the U.S. stock market's unsettled history during the month of September. It was a year ago this week on Sept. 3 that Lehman Brothers collapsed, bringing the entire global financial system to its knees. And it was also in September 2000 that the post-dotcom bubble collapse accelerated. Two years later, in September-October 2002, the bear market hit its lows. And although the 1998 financial crisis began in late August, it was in September that super hedge fund Long Term Capital Management collapsed.
But September's weakness stretches back farther into the past. The crash of 1987 may have happened in October, but the market began its descent right around Labor Day. And although the crash of 1929 is commonly associated with October, the market peaked just around this time of the year. The worst month of the Great Depression? That took place in September 1931, when the Dow fell a whopping 30%.
This is also one bit of market lore that stands up to rigorous statistical examination. Since 1926, September is the only month of the year with an overall negative average return in U.S. markets. In every other month, investors have averaged a 1% gain. Of equal importance, the September anomaly holds true not only for the United States. A recent Georgia Tech study looked at data for 18 developed stock markets around the world going back as far as 200 years. Among the markets examined, investors lost money in September in 15 of them.
A Peculiarly Dangerous Month: The Bears Roar
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Nor are the economic fundamentals of the global economy any more compelling. Global trade has collapsed with Japanese exports still down 37% from their peak, and shipments to China 15% lower than a year ago. Toyota announced last week that it was planning to shut an assembly line for the first time in its 72-year history. Consumer confidence in the United States has fallen to a four-month low, bad news for a sector that represents 70% of U.S. GDP. And then there is always a possibility of "Black Swan" events like a sudden surge in swine flu that could infect as much as 50% of the U.S. population, and result in up to 90,000 deaths.
A Peculiarly Dangerous Month: Your Strategy?
Why markets do so poorly in September is one of the great mysteries of stock market history. Some even blame seasonal affective disorder. Investors simply get grumpy and sell just as the days get shorter.
Yet for all of its apparent predictability, there's not that much you can, or even should, do. For one thing, no s tock market pattern is writ in stone. The stock market actually jumped in both September of 2006 and 2007. And unless markets completely fall out of bed, as they did last year, the transaction costs of selling before the end of August and re-entering the market a month later are not worth it.
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So view the current negativity in global markets as a welcome sign. It lowers expectations. And it's when low expectations are beaten that markets really break out on the upside. After September's bout of nervousness, get ready to pile back into global stock markets for what I expect to be a very strong fourth quarter.
Sincerely,
Nicholas A. Vardy
Editor, The Global Guru
P.S. If you want to potentially profit from the "September Swoon," look no further than my trading service Global Bull Market Alert. My latest pick is a way to profit from a downdraft in global stock markets, just before looking forward to a strong fourth quarter for Global Bull Market Alert subscribers. Join us by signing up for Global Bull Market Alert today.
P.P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy.
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