30 Days Hath September

Historically, September has been the worst month of the year. It might be better to say that mid-September to mid-October is historically the worst period of the year for stocks. Humans however have this nasty habit of measuring time in hours, days, months, weeks & years so the historical statistics don't necessarily adequately measure the correct 4 to 6 weeks. In any event historically the S&P 500 loses 1-1.5% during September while September & August are the only two months of the year to show a negative return.

Of course it could be that a September swoon has been widely discussed recently by the financial press that perhaps it will not show up this year. Like I said the other day, the prospect of lower interest rates and lower energy prices may trump a weakening economy in the minds of shareholders and we might glide through this period unscathed.

I will remain for the time being in a more cautious mode. As I showed yesterday the S&P was up over 2% last month. This type of gain is at best usually followed by a period of price consolidation and often some sort of correction. The market is now very overbought as measured by my indicators. For an example one of the things I follow is the percentage of stocks above their 40 day moving averages. This statistic supplied by Worden Brothers is a pretty reliable indicator of where we are. This indicator flashes warning signals each time it goes above 60% of stocks above their 40 day averages. Above 70% the warning signals flash bright red. Historically readings at this level are followed most of the time by a sell off in share prices. Currently this reading is close to 80%.

One other thing to remember is that historically (at least in the 3 years) September has started out OK. Its later in the month that I am most concerned about. In a market swoon today cash is a well paying safe haven while I wait for the inevitable bargains that will be created when the sell off is done.

Does this mean that prices have to go south this month? No it doesn't and I certainly don't know if they will. I just follow probabilities and the indicators that I use tell me that our field position is not as good at the moment as we would like.

Again don't be lulled into complacency if nothing happens to stock prices next week. September has 30 days. I'm more worried about the last 20 days of the month than the first 10.