Federal workers, and many other fine folks, celebrated Labor Day yesterday by partaking in lethargy. Here at the Economic Prism we did nothing of the sort. Rather, we continued our labors for fun and for free…and always on your behalf.
With August now behind us, and September now in front of us, there’s much to be garnered looking back to the future. Gazing back through the rear view mirror we see a stock market that appears to have crested. In fact, both the DOW and the S&P 500 closed out August with their worst months since May 2012.
Is the market just taking a pause, to collect its breath, before its next leg up? Or is it rolling over for a big bear market slide down? Only time will tell what to make of it.
In the meantime, your broker may tell you to ‘buy the dip.’ A technical trader will look at his lines of resistance and say the bull market’s still intact. Permabears will point to the August decline as evidence the market will crash 50 percent – or more – any day now. Of course, no one really knows for sure.
However, for what it’s worth, September has notoriously been a bad month for stocks. Plus there are plenty of other things the market has to contend with. Here’s what we mean…
Unknown Unknowns
“Is the stock market setting up for a big fall as summer turns to fall?” asks USA Today.
“Wall Street is facing a long list of headwinds that could be the catalyst to cause the stock market to flirt with its first true market correction, or a drop of 10 percent or more, since July 2011.
“Indeed, the market’s so-called ‘Wall of Worry’ is as tall as the Empire State Building.
“Risks abound. Stocks are heading into a seasonally weak period. Congress is gearing up for another brawl over the budget. The drumbeat of war is growing louder due to the Syrian crisis. The Federal Reserve meets mid-month to decide whether it is finally time to pull back on its market-friendly stimulus.”
These risks are the known unknowns. In addition, there are what Donald Rumsfeld once called the unknown unknowns to contend with. The fat tail, black swan, events that no one can predict…another 9/11 or Fukushima or worse.
No doubt, something big is coming. You can count on it.
Secrets of the September Swoon
Where the stock market is concerned anything, and everything, can happen. The most direct way to make money in stocks is to buy low and sell high. While this sounds simple enough, it is much more difficult in practice.
How do you know if a stock’s price is low or high?
You can go by its valuation, like price to earnings or price to book. Or, perhaps, you can go by the technical indicators, like moving averages or stochastic oscillators. Regardless, an unknown unknown can make mincemeat of your best laid plans.
But if you have patience and have a long term time horizon, you can be sure to buy at a great price…if you’ve got the guts to do so. One way to tip the scales in your favor is to use stock market seasonality to your advantage.
“Since 1971,” reports MSN Money, “September has been by far the worst month of the year for U.S. stocks. The average September return on the Standard & Poor’s 500 Index from 1971 through 2012 is a loss of 0.52 percent, according to the Stock Trader’s Almanac.
“Considering that only three other months show an average loss of any size over that period and that the second-worst loss is the 0.1 percent turned in by February, September sticks out like a very sore thumb.”
Certainly, having some cash on hand right now is a shrewd thing to do. The looming debt ceiling debate, conflict with Syria, possible Fed tapering, and that it’s September, could trigger the stock market selloff we’ve been waiting for. Being patient and prepared to buy following a price correction is the secret to using the September swoon to your favor. Though, few will actually take advantage of it.
Sincerely,
MN Gordon
for Economic Prism
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