Watching the market in September is like watching an 80’s horror movie – you know the plot, you know how badly it will end, and you know at some point you may hurl all over your shoes.
This year is different.
The market historically declines in between Labor Day and Halloween. It’s a phenomena that doesn’t have a consistent explanation. Some analysts say it’s mutual fund profit-taking before their year end. Others say it’s investors just selling under the belief that the market will fall. The Catch-22 is that the selling may actually cause the decline.
One thing is clear – this year is much different.
The blue line below shows the average seasonal trend of the US Dow index since 1992. The red line is the Dow’s trend so far in 2012. The y-axis is the percent change of the Dow over the course of the year.
Notice how for the past 20 years in September, the Dow usually declined. This has actually been the case since 1980. But this year, the Dow is way up in September. It’s been following its normal trend for most of the year (on steroids), but is now off trend.
It’s not unusual to have years where the market doesn’t follow its historical trend. Nevertheless with such a pronounced September rally this year, some wonder if it’ll deflate just as quickly as it went up.
I believe the market will hang out at its current level until the next big positive or negative announcement. I don’t believe we’ll see a collapse on a negative announcement. However, a positive announcement could send the market up higher than we’ve seen since 2007.
Nevertheless, the market feels precarious at these levels. As a result, I’m watching for bubbles. I’m especially watching to see how quickly the underlying economy improves (especially unemployment).
The latter will confirm whether this unusual month is the start of an exciting new chapter in the US, or a sequel to the horror show we’ve all seen before.