By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- September has recently started
shedding its reputation as one of the worst stock market months of
the year, but strategists note the psychological pressure of big
round numbers in the S&P 500 Index and the looming end of
Federal Reserve asset purchases may serve to reinforce the month's
stereotype.
On Friday, the S&P 500 (SPX) finished the week up 0.8% at
2,003.37 for an all-time high close and its longest winning streak
since late November. The Dow Jones Industrial Average (DJI)
finished the week up 0.6% and the Nasdaq Composite Index (RIXF)
rose 0.9%.
Those gains, however, have been made on the back of the
traditional low summer volume, and the concern is that traders
returning from vacation to the Labor Day-shortened trading week
will spark a selloff.
"There's more downside than upside triggers," said Brad
McMillan, chief investment officer for Commonwealth Financial.
"We're in a high-risk environment with no energy. There's a bunch
of yellow flags that can become red flags in a time where the Fed
is not actively stimulating the market."
Even though the Fed will be making the last of its monthly asset
purchases in October, there should be little surprise September is
looked upon with caution.
September can't seem to shake its bad reputation
Of the 20 worst months since 1987, September makes the list four
times (down 11% in 2002; down 9.1% in 2008; down 8.2% in 2001; and
down 7.2% in 2011). October tops the list as the worst "crash"
month with a 22% loss in 1987 and a 17% loss in 2008. For that
matter, November doesn't fare very well either with losses of 8.5%
in 1987, 8% in 2000, and 7.5% in 2008.
But if you go back even further to 1945, it's even more apparent
where September gets it's bad reputation. Sam Stovall, U.S. equity
strategist at S&P Capital IQ, notes the S&P 500 has ended
September higher only 45% of the time, the worst showing of any
other month, declining an average 0.55%.
The chart below shows how September stacks up against other
months over that time period:
"Should the S&P 500 decline this September, the bears will
probably say 'See, I told you so,' while the bulls will simply
remind them that 'A broken clock is right twice a day' (but not if
it's digital)," Stovall said in his note.
Then again, if we shorten the period averaged, September begins
to look at lot better. Going back to 1987, the average September
decline has been 0.27%, and if we're just including those
Septembers of the past bull market (and Fed easing efforts), the
S&P 500 gains an average 2.11% in September.
Expect a small pullback to sideways markets in September, said
Randy Frederick, managing director of trading and derivatives at
Charles Schwab, less because of the month's reputation and more
from psychological resistance to venture past a 2,000 S&P 500
during a month that's likely to see few, if any, surprises from
economic data or from the Fed's mid-September meeting.
Frederick said 2014 has already defied several seasonal trends,
such as turning in a weak January and the S&P 500 gaining more
than 5% since Memorial Day, so he's less concerned about
September's reputation.
Volatility should ramp up ramping in markets the closer we get
to the Fed's final tapering near the end of October and the midterm
elections, he said.
Summer's over. Winter is coming.
Record stock valuations are also coming off a decent earnings
season, a quicker-than-expected pace of economic recovery, and
pressure on the European Central Bank to stimulate Europe's
economy, Commonwealth's McMillan said. The road ahead is not
looking so rosy, he said, citing the apparently worsening situation
in Ukraine, China's slowing growth, and a Fed rate hike that could
come sooner than expected after asset purchases stop.
McMillan points to Fed Chairwoman Janet Yellen's Jackson Hole
remarks that the Fed could start tightening sooner than expected if
economic data continues to surprise to the upside.
"She didn't have to say that, but she made a point of closing
her speech with it," McMillan said.
Expectation for rate hikes have gone from 2016 to mid-2015, and
there's talk of maybe even March 2015 if wage growth pick up, he
added.
The major data point of the coming week will be the August jobs
numbers and unemployment rate on Friday. Economists surveyed by
MarketWatch expect the addition of 223,000 jobs and a 6.1%
unemployment rate.
Given the landscape, where are a few places to look?
"There are so many people who are non-believers in a post-2000
S&P 500, the more likely it can go higher on low volume, but
until you get more fixed income investors going into stocks, you
can't say there are a lot of true believers," said JJ Kinahan,
chief strategist at TD Ameritrade.
With higher interest rates on the horizon, Kinahan favors
financial stocks given they've adapted to the near-zero interest
rate environments.
"They've become well-managed with a zero spread, think of what
they can do with a point or two," he said.
Retail sector stocks are not as attractive seeing the sector has
been sending mixed messages with players like Wal-Mart Stores Inc.
(WMT) cutting its outlook while companies like Tiffany & Co.
(TIF) raising theirs. That would suggest the average consumer, who
drives the bulk of the economy, is strapped.
Another area to keep an eye on is how homebuilders and retailers
like Home Depot Inc. (HD) and Lowe's Cos. (LOW) are performing,
seeing that job and wage growth lead more people to buy homes or
fix them up, Kinahan said.
A few homebuilders report earnings this week with Toll Brothers
Inc. (TOL) on Wednesday and Hovnanian Enterrpises Inc.(HOV) on
Thursday.
Commonwealth's McMillan sees businesses increasing their
spending more than consumers at this point as personal savings
rates rise and more households pay off debt. Given that, stocks to
focus on would include the tech sector and domestic
manufacturing.
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