ASSET CLASS: Beware The Ides Of September
03 Sep 08:21
By Alen Mattich
A DOW JONES NEWSWIRES COLUMN
LONDON (Dow Jones)--September is not a very good month for equities. In fact,
it's one of the worst, warns David Schwartz, a historian of the stock market
and a media pundit.
There are three months of the year when the odds of a 5% drop in markets are
greatest, and September is one of them, he says. May and June are the other
two.
Schwartz, a Bronx-born statistician who came to the U.K. in 1987 after
selling his market research firm, took up delving into market trends when he'd
grown tired "of buying at the top and selling at the bottom."
He has no axe to grind, he says; he's no analyst for an investment bank. From
his base in the genteel English county of Gloucestershire, he just looks at the
figures and picks out the trends. Which, if laborious, is at least less messy
than the chicken entrails Julius Caesar's soothsayer would have relied on.
And his strings of numbers say avoid September.
Shares fell during September more than half the time during the past 20
years, he says. And the September tendency has gone from bad to very bad in
recent years.
But why?
Schwartz says he doesn't know and can only offer an educated guess.
Many brokers - the ones who are fond of remembering the old adage "sell in
May and go away" - say that September is the post holiday period, when fund
managers finally get back to their desks and gear up for business.
It's hard, in this age of foregone holidays, to think that fund managers
would disappear for three or four months and then start spreading around the
sell orders.
But the tendency could have something to do with the economy, says Schwartz.
Industry goes through a seasonal cycle and it could be the case that market
participants hold off during September to see how strong the lift will be from
the summer doldrums.
He also points out that September follows a generally strong month for
trading. August tends to be good for shares - as it was this year.
August is important in more ways than one, says Schwartz. The last week in
July and the first couple in August tend to be a strong indicator for how the
rest of the year will turn out. This year's big rally during those three weeks
is a bullish signal.
Schwartz concentrates on the U.K. market because the U.K. affords the longest
series of reliable numbers - the series he uses stretch back as much as 200
years. But monthly effects are common elsewhere, often the same ones.
For instance, it was long recognized in the U.S. that shares rose in January.
But this so-called January effect has dimmed as the rally got earlier. There's
now a Father Christmas effect, says Schwartz.
"The stock market is one of those awful areas in which success breeds
failure," he says.
Academics and practitioners are divided on whether this sort of seasonal
technique can be of any practical use.
Robert Shiller, the economist whose book "Irrational Exuberance" presciently
marked the top of the late 1990s bubble, argues that, contrary to prevailing
theory, the stock market isn't efficient. Instead, it's susceptible to investor
psychology, be it faddishness, excess euphoria or excess pessimism. This
creates anomalies that can be exploited by savvy traders.
Burton Malkiel, another Ivy League economist and author of the seminal "A
Random Walk Down Wall Street," takes the opposite view. For him, the market's
not predictable. Patterns that analysts dig up, like seasonal effects, are the
product of data mining. And even where there does seem to be some sort of
predictable trend, the transaction cost involved in trading it offsets the
impact of the trend.
Whatever the merits of short-term trend analysis, Schwartz thinks that longer
term the market returns to fundamentals.
The late July, early August rally signals that the current bear market has
bottomed, he says, and now the market is backon an uptrend.
"Whether that trend lasts three, six or 15 months, I don't know," he says.
But eventually the downtrend will kick back in.
Price to earnings ratios are a terrible indicator for short-term trends.
"On a short-term trend a P/E of 15 or 25 has the same probability of a
bounce," he says.
But down the line, they tell.
"Over two centuries of data from the U.K. where prices are weak in a 15-year
period, they tend to perform well in the following 15-year period. But whey
they've been very strong for 15 years, they then underperform in the following
15 years," he says.
This reversion to the mean suggests that the next decade at least is going to
be very gloomy for U.K. equities investors, even if the next couple of months
are modestly good.
-By Alen Mattich, Dow Jones Newswires; 44-20-7842-9286;
alen.mattich@dowjones.com
(END) DOW JONES NEWS 09-03-02
08:21 AM |
