Sep. 3–The stock market’s strong showing this summer could portend a stormy September and October for investors.
For stock investors, September has historically proved the year’s most difficult month — even worse than October, which is famous for big crashes.
“September is not the best of months,” said Gibbons Burke, a New Orleans-based editor of MarketHistory.com. “Emotionally and psychologically people buckle down for winter. They take a look at their portfolios and weed out losers.”
The Dow Jones industrial average has declined an average of 1.29 percent in September during the past 107 years versus an average monthly gain in the Dow of 0.57 percent.
Septembers tend to get rockier after stock markets have enjoyed gains of 5 percent or more between Memorial Day and Labor Day, Burke said.
When that has happened during the past three decades, the Dow seven times out of 10 has gone on to show losses, Burke notes, with an average decline of 2.1 percent in September.
Losses accelerate in October in those cases.
This year both the Dow and Standard & Poor’s 500 are up more than 8 percent for the summer, compared with average summer gains of 3.2 percent and 3.9 percent respectively. The Nasdaq composite index rose 20 percent this summer.
“When the market rallies through August, it pulls back in September and puts in a low in October,” said Paul Schatz, chief investment officer with Beneficial Capital in Connecticut.
The strong-summer, anemic-autumn pattern is most noticeable for blue-chip and large company stocks, Burke said.
Charles Biderman, president of Liquidity Trim Tabs, a firm which measures the money flowing in and out of the markets, offers other reasons for caution: Companies are buying back far fewer of their shares than they did last summer. In August 2002, there were 127 stock buybacks worth $14 billion; last month there were only 49 worth $5.5 billion. Companies typically buy back their shares when they are confident they will move higher in value.
Corporate insiders, who are supposedly in the know, have also been net sellers of their shares rather than buyers for the past several months, according to Thomson Financial. When insiders are selling, that can indicate a lack of confidence in the market.
July and August are usually weak months, but Biderman notes that as much as $100 billion moved out of bonds into stocks because of rising interest rates.
Because hedge funds, portfolio managers and skittish bond investors have piled into the equity market, Biderman predicts there will be little new cash to move stock prices higher this fall.
But nothing is ever certain with stocks, observers note.
“The market will do its best to confound the masses,” Schatz said.
In June, everyone was quoting an old market saying, “Sell in May and go away,” Schatz said.
According to the Stock Trader’s Almanac, the period between May and October is historically weak, while November to April provides the best returns.
“We had a very good June, July and August,” he said.
But investors who want to play the odds should be wary in September and October.
Across its 107-year history, the Dow has lost more than 8 percent in 67 different months. Of that number, 11 were Septembers, double the number that would be expected if those declines were random, Burke notes.
Schatz predicts the S&P 500, which closed Tuesday at 1,021.99, could reach as low as 950 to 960.
He recommends buying stocks as they fall in September and October in expectation for a strong finish in November and December.
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