And while the list of topics to discuss in future morning missives is long at the moment (including: has a new secular bull begun?, the 3 ways to beat the stock market, the importance of D.R.P. (having a definable, repeatable, process), diversification is for dummies, the economic model isn't happy, absolute return strategies are really bond funds in drag, and target date funds are for fools), probably the most timely topic for this morning is the state of the stock market cycles.
"September Is the Cruelest Month"
While October is technically the worst month for the stock market on a statistical basis due to the propensity for stocks to have crashed during the month, September is actually the month that investors should fear the most.
According to Mark Hulbert, since 1896 (when the Dow Jones Industrial Average was created), the venerable index has lost an average of 1.07 percent during the month of September. And since 1929, the Dow has lost an average of 1.3 percent each time September rolled around. For the record, the average gain for all other months is 0.71 percent. And for those keeping score at home, that's a spread of 1.78 percentage points, which, statistically speaking, is meaningful.
Hulbert also pointed out that during each of the last nine decades, September's rank relative to other months in terms of performance has never been higher than ninth. Ugh!
So, with Syria, the Fed talking taper, and the U.S. slated to run out of money again as early as next month, friends in the bear camp are currently pretty excited about their prospects for the rest of the month. And since sometimes market traditions tend to become self-fulfilling prophecies, it would be a good idea to check in with the cycle composite to see if there is hope for the bulls.
Since this is the ninth time this year that we've done a review of the cycle composite, let's dispense with all the disclosures and disclaimers about not using cycle work in a vacuum, but it is an important input into models. And to review, the cycle composite is a combination of the one-year seasonal, the four-year presidential and the 10-year decennial cycles [size=11pt; line-height: 115%; font-family: Calibri, sans-serif]— [/size] all going back to 1928. So, with that out of the way, let's get to it, shall we?
Question 1: Is The Market in Sync with the Cycle Projections?
The first thing to do each month is to get a feel for whether or not the cycle projections are "on" or not at the present time. Looking at last month, the cycle composite didn't do so well. In sum, the composite called for a modest rally, and instead we got a modest decline. As such, we'll have to say that the composite is a bit out of whack with the price action at the present time.
But from a longer-term point of view, the market (as defined by the S&P 500) is staying pretty close to where the composite projection says it should be in 2013. And in looking at the market versus the projections since 2009, the S&P is fairly close to where the cycles say it should be. However, it should be noted that the cycles have been calling for a stronger rally than we've actually seen this summer. Although it is a safe bet that all the "taper talk" may have been a factor.
Question 2: What Does September Look Like?
Next, let's take a look at what the cycle projections are calling for during the month of September:
One-Year Cycle: The bottom line is the picture painted by the one-year seasonal cycle is not pretty as after the first week or so, the cycle suggests it will be all downhill.
Four-Year Cycle: Ditto for the four-year Presidential cycle - only worse. This cycle basically points straight down for the entire month. The only appropriate adjective to be used here is ugly.
10-Year Cycle: The saving grace appears to be the 10-year cycle, which looks a bit different from the one- and four-year cycles. In short, the 10-year suggests the month will be more of a sideways affair. However, the bad news is: (a) the month is projected to end lower and (b) there is no real rally projection to speak of during the entire month.
Cycle Composite: Given that two of the three component cycles are down and down hard, it isn't surprising to see that the cycle composite also paints a less than optimistic picture of the month of September. The good news is (a) the cycle composite can remain "out of sync" for extended periods of time and (b) the composite is only one of 10 inputs in our market environment model.
However, it is important to note that this particular input will have an overall negative bias this month. Again, this analysis should NEVER be used in a vacuum and is NOT a reason to be negative toward stocks overall. But, should the market continue to struggle in the near term, traders should know that such action would be pretty "normal" for this time of year.
So... as a risk manager, while the bulls could always get something going should the situation in Syria subside quickly, the cycles suggest that it might be a good idea to be careful out there for a while.