Calendar May Turn in Favor of Bulls
Saturday September 14, 2:00 pm ET
biz.yahoo.com
By Pierre Belec
NEW YORK (Reuters) - The summer dashed hopes of a market rebound and instead brought gyrations that have nailed stocks to 5-year lows. But if history repeats, the summer's pains may be replaced with gains in the fall, once we get over September -- the most horrific month for Wall Street.
The countdown to a possible market bounce is on. What's happening is the market is about to enter a period when stocks have traditionally moved higher.
Indeed, pieces of this puzzling market appear to be falling into place after a year of awesome volatility and tremendous nail biting by investors. The leading stock indexes snapped back more than 20 percent from 5-year lows reached in July -- a rally equivalent to an unsustainable 700 percent gain on an annualized basis -- only to give up a big chunk of the recovery.
The good news is the calendar has historically worked in favor of the bulls starting in November. And the smart money may run ahead of the herd and start loading up on stocks before the bullish seasonality.
The best time to buy is between November and April, according H.D. Brous & Co., a brokerage house. It's also known as the "buy for six months, then stay out of the market and pray" strategy.
A sum of $10,000 bankrolled in the 30 stocks of the Dow Jones industrial average since World War II would have returned more than $426,000 if invested from November to April, says Brous. The same $10,000 would have eked out a return of only $11,750 when invested in the other six months.
The Stock Trader's Almanac agrees. Going back to 1950, a compounding $10,000 invested between November and April would have exploded to $415,890, while the return from a similar investment made between May and October would have grown by just $1,743.
THE BIG IFS
All bets are off if President Bush, following the U.S.-led victory in Afghanistan, launches an attack on Iraq or the economy takes a major downturn. The prospect of a war against Iraq and the resulting run-up in crude oil prices would probably cause investors to flee the stock market.
Oil prices are already hugging the $30-a-barrel level. Worth remembering is that a jump in oil prices to $30 has preceded the last four recessions.
The cold reality, though, is investors may have to bear more battle scars before November.
September is traditionally the cruelest month for stocks.
"Over the past 50 years, September has proven to be the worst month for investors, with 60 percent of them experiencing losses in the Standard & Poor's 500 index," says InvesTech Research.
September has also been the poorest in terms of market return in years when stocks have been on a downward course.
Another reminder for history buffs: August rallies occurring on typically light summer trading volumes have often been a prelude to bear routs in September. So far this year, the S&P has made investors 20 percent poorer, while the Dow is down 14 percent.
OCTOBER VS. SEPTEMBER
What about October, you may ask?
October is reputed to be the biggest wealth destroyer, but the truth is that October is a cakewalk compared with September.
"October is known as the 'jinx' month because of crashes in 1929, 1987, the 554-point drop on Oct. 27, 1997, back-to-back massacres in 1978 and 1979 and Friday the 13th in 1989," the Almanac says.
"Yet, October is also a bear killer, having turned the tide in nine post-World War II bear markets. And the worst six months of the year have ended in October," it says.
This year, the seasonal spike in stocks could get a tremendous boost from the record level of short interest in the market.
The short interest on the New York Stock Exchange stood at a record 8,079,414,124 shares through the middle of August, eclipsing the old high of 7,554,090,306 in July.
A massive rush by short sellers to buy stocks they sold may also generate the type of increased trading activity that bull markets thrive on.
But there is a sense the former high-flying technology stocks, which have crashed and sent the Nasdaq Composite index down an eye-popping 70 percent from its high, may have trouble keeping up with the old-economy stocks in the Dow and S&P.
History shows that when Nasdaq's loss has not been accompanied by as sharp a drop in the Dow and S&P, the Nasdaq has had a tough time rebounding.
The other risk is that mutual fund managers who are holding buckets of fallen tech angels may use rallies to cash out of the money-losing sector.
DEPRESSED TECH COMPANIES
The earnings of technology companies continue to be depressed and there's no evidence of a turnaround any time soon.
"Hundreds of fund managers are finally realizing these companies are no longer growth companies," says Carlton Lutts, editor of Cabot Heritage Corp., which publishes investment newsletters. "Institutions are overloaded with (technology) stocks, and many are trying to get rid of them without depressing the prices further, an impossible task considering the number of shares they own."
More than a thousand institutions this summer held Cisco Systems, (NasdaqNM:CSCO - News) Intel Corp., (NasdaqNM:INTC - News) Dell Computer Corp., (NasdaqNM:DELL - News) Microsoft Corp. (NasdaqNM:MSFT - News) and Sun Microsystems, (NasdaqNM:SUNW - News) he says.
"If you were a fund manager trying to get rid of 400,000 shares of Sun Microsystems (now selling at about $3 a share, down from a high of $65), can you imagine the traffic jam?" Lutts says. "Imagine the pressure to get this stock out of your portfolio."
For the week, the blue-chip Dow Jones industrial average (CBOT:^DJI - News) fell 1.4 percent to 8,313, while the tech-loaded Nasdaq composite index (NasdaqSC:^IXIC - News) dipped 0.3 percent to 1,291, and the broad Standard & Poor's 500 (CBOE:^SPX - News) dropped 0.5 percent to 890.
(Pierre Belec is a freelance writer. Any opinions in the column are solely those of Mr. Belec.)
I wish I could find more good news Don. The truth, as you no doubt know, is that even the writers of articles like the insider buying article I brought over here today are struggling to find a good slant. I would like to see insiders buying at CSCO, INTC and AMAT among others to really make me feel like a bottom is in. Maybe when September is over we can begin to look forward to some better months for the market ahead.
RtS |
