Market Outlook
Since sinking to its three month low in early August, the
S&P 500 index finished higher in twelve of the last sixteen trading
sessions. The index also finished a fourth consecutive weekly advance and sixth
positive month out of the past seven. The S&P finished Friday with its
third record close of the week. "We reached and closed above the 2,000 milestone
this week and that gets the mental obstacle out of the way," said Andre
Bakhos, managing director at Janlyn Capital LLC in Bernardsville, New
Jersey. "Economic numbers have been positive for the most part, people are
drawing comfort from these numbers, using them as a justification for
optimism."
Trading volume has been light, on Friday only 3.8 billion
shares traded on U.S. exchanges, well below the 5.29 billion average so far
this month, according to data from BATS Global Markets. The past week's trading
volume has been among the lightest of the year, with action muted going into
the Labor Day holiday in the United States. Markets will be closed on Monday.
It has been reported that since 1950, September is the worst
performing month of the year for the major stock indexes, a majority of
analysts feel the August lows will maintain as support for the remainder of the
year. We expect volatility to increase over the next two months from the
current historical lows including another price pullback. After the midterm
elections the stock market should strengthen and finish the year on a strong
note. Don’t be surprised if September starts strong as it has in thirteen of
the last nineteen years. But the market begins to fade as money managers’ start
selling off losers and repositioning assets for the end of the third quarter
window dressing.
In the updated graph below you can see treasury bonds have
dwarfed the performance of other assets so far in the third quarter. A lot of
market watchers are dumbfounded that rates are able to remain so low. It is
suspected that the lack consumer participation in the economic recovery is
minimizing inflationary pressure, which in turn forces financial institutions
to suppress loan interest rates to entire borrowers. Treasury prices move
opposite interest rates, so as rates trend lower bonds move higher.
Investor Analysis
The Stock Trader’s Almanac discussed how in recent years,
Labor Day has become the unofficial end of summer and the three-day weekend has
become prime vacation time for many. Business activity ahead of the holiday was
more energetic in the old days. From 1950 through 1977 the three days before
Labor Day pushed the DJIA higher in twenty-five of twenty-eight years.
Bullishness has since shifted to favor the two days after the holiday as
opposed to the days before. DJIA has gained in 14 of the last 21 Tuesdays and
15 of the last 21 Wednesdays following Labor Day. S&P 500 and NASDAQ have
been slightly less bullish on the Tuesday and Wednesday after Labor Day.
The table below displays all the positive S&P Augusts
since 1950 followed by the gain for September, October, the Summer Rally, the
Worst Six Months, the rest of the year, the gain for the whole year and the
subsequent Best Six Months. The current month-to-date August gain of 3.6% is in
line with the average for up Augusts. Interestingly, there is no difference in
September and October is weaker after an up August. There is a slight
improvement in the summer rally and the Worst Six Months, but the rest of the
year and the subsequent Best Six Months are weaker and the whole year is the
same.
By Gregory Clay
Investment Strategist
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