Wall Street wisdom urges caution about any big moves into stock in September, the market's cruelest month.
History shows September is the biggest loser for the Dow Jones Industrial Average, S&P 500 and Nasdaq indexes. Stocks fell in 33 of the past 52 Septembers. The biggest monthly percentage loss for the Dow Jones industrial average occurred in September (43 percent) as did the biggest monthly loss for the S&P 500 (27 percent), according to The Stock Trader's Almanac. The average move for the Nasdaq index in Septembers from 1971 to 2001 was a loss of 26 percent.
The U.S. market's spring rally has stretched into summer, based on the hope of an economic recovery and a rebound in corporate profits. Since March 11, the Dow average is up about 25 percent and the Nasdaq about 40 percent higher.
SUMMER IN THE HAMPTONS
But the upward movement has lacked conviction and, especially in recent days, come on light volume. Many Wall Street players are on holiday at the beaches of Long Island and other vacation spots. Those left behind are searching for firm direction.
"The traders are out in the Hamptons. When they return, the market will choose a direction, but right now it is just floundering," said J. Taylor Brown, vice president of the Hirsch Organization, publisher of The Stock Trader's Almanac.
Opinion is divided whether this is a bull market or a bear market, said Brown. Strategists at Merrill Lynch recently voiced doubts about global cyclical recoveries.
"The prospects for equities going forward will depend on their ability to deliver a sustained recovery in earnings and the quality of the cycle," Merrill wrote in a report.
One of the elements missing for a sustained cyclical recovery was industrial pricing power -- companies' ability to raise prices and make them stick. Pricing power doesn't appear in the economic measures, according to the Merrill strategists. "Look at either the U.S. ISM 'prices paid' or the core crude PPI inflation rate and the picture is weak."
GETTING MUSCLED OUT
Besides uncertainty about the economy, the market is struggling with thin volume, which can make it tougher for the average investor. "The little guy tends to get muscled out when volume is light," Brown said.
But when mutual fund managers return to their desks next week, they will begin sprucing up their portfolios ahead of the end of the third quarter, Brown said. The fund managers are preparing for the all-important fourth quarter and yearly fund results.
Brown said funds tend to sell stock in September as they restructure portfolios and take capital gains, adding to the market's downward pressure.
The stock market faces another hurdle in September: corporate earnings warnings. But Hugh Johnson, chief investment strategist for First Albany Corp., says this "confession season" may see more companies raising their forecasts than issuing warnings -- unlike the past three years.
"There is a chance this could turn out to be one of the good Septembers," Johnson said.
"I don't sense many companies will be warning that earnings will be below forecasts. Quite to the contrary," he said.
BETTER EARNINGS
Despite the Merrill Lynch strategists' misgivings about pricing power, Johnson says the Journal of Commerce's index of materials prices has risen since May. The dollar's drop last year and early this year seems to have helped multinational companies raise prices for their products. Hence, news about earnings in September may turn out better than expected.
Brown says the best strategy in September is to stay on the sidelines or at least be well diversified. Stocks typically rise at the start of the month, then face more difficulties near the end.
History shows September is the biggest loser for the Dow Jones Industrial Average, S&P 500 and Nasdaq indexes. Stocks fell in 33 of the past 52 Septembers. The biggest monthly percentage loss for the Dow Jones industrial average occurred in September (43 percent) as did the biggest monthly loss for the S&P 500 (27 percent), according to The Stock Trader's Almanac. The average move for the Nasdaq index in Septembers from 1971 to 2001 was a loss of 26 percent.
The U.S. market's spring rally has stretched into summer, based on the hope of an economic recovery and a rebound in corporate profits. Since March 11, the Dow average is up about 25 percent and the Nasdaq about 40 percent higher.
SUMMER IN THE HAMPTONS
But the upward movement has lacked conviction and, especially in recent days, come on light volume. Many Wall Street players are on holiday at the beaches of Long Island and other vacation spots. Those left behind are searching for firm direction.
"The traders are out in the Hamptons. When they return, the market will choose a direction, but right now it is just floundering," said J. Taylor Brown, vice president of the Hirsch Organization, publisher of The Stock Trader's Almanac.
Opinion is divided whether this is a bull market or a bear market, said Brown. Strategists at Merrill Lynch recently voiced doubts about global cyclical recoveries.
"The prospects for equities going forward will depend on their ability to deliver a sustained recovery in earnings and the quality of the cycle," Merrill wrote in a report.
One of the elements missing for a sustained cyclical recovery was industrial pricing power -- companies' ability to raise prices and make them stick. Pricing power doesn't appear in the economic measures, according to the Merrill strategists. "Look at either the U.S. ISM 'prices paid' or the core crude PPI inflation rate and the picture is weak."
GETTING MUSCLED OUT
Besides uncertainty about the economy, the market is struggling with thin volume, which can make it tougher for the average investor. "The little guy tends to get muscled out when volume is light," Brown said.
But when mutual fund managers return to their desks next week, they will begin sprucing up their portfolios ahead of the end of the third quarter, Brown said. The fund managers are preparing for the all-important fourth quarter and yearly fund results.
Brown said funds tend to sell stock in September as they restructure portfolios and take capital gains, adding to the market's downward pressure.
The stock market faces another hurdle in September: corporate earnings warnings. But Hugh Johnson, chief investment strategist for First Albany Corp., says this "confession season" may see more companies raising their forecasts than issuing warnings -- unlike the past three years.
"There is a chance this could turn out to be one of the good Septembers," Johnson said.
"I don't sense many companies will be warning that earnings will be below forecasts. Quite to the contrary," he said.
BETTER EARNINGS
Despite the Merrill Lynch strategists' misgivings about pricing power, Johnson says the Journal of Commerce's index of materials prices has risen since May. The dollar's drop last year and early this year seems to have helped multinational companies raise prices for their products. Hence, news about earnings in September may turn out better than expected.
Brown says the best strategy in September is to stay on the sidelines or at least be well diversified. Stocks typically rise at the start of the month, then face more difficulties near the end.
