Good Quarter; Mild Month; Then What?
For the first time in 3 years, the market has put together back-to-back winning quarters. In the third quarter, the Dow gained 3.2%, the S&P 500 eked out a 2.2% gain. The big winner was the Nasdaq, up 10.1% for the quarter.
September, however, was a losing month. Although there was plenty of disconcerting news, it was likely just a matter of a hot market taking a pause to consolidate its outsized gains. Considering all of the negative headlines – MYAG Eliot Spitzer’s mutual find investigation, NYSE Chair Grasso’s compensation affair, the G7 and weak dollar issues, and the continued hangover from the Iraq war – the market absorbed the news rather gracefully.
Despite September’s fearsome reputation, the indices lost less than 2%. For the month, the S&P 500 dropped a mere 12 points (-1.19%), the Dow gave up 140 (-1.50%) while the volatile Nasdaq gave back only 23.6 points (1.30%).
October doesn’t care about its bad reputation (especially not if we go by the first day of the month): As the numbers above make clear, the indices made up all of their September losses in one day. In our opinion, this strength was likely a combination of programmed trading and institutional deployment of fresh fund flows, rather than a reaction to the ISM number. The good (but not great) volume yesterday lends further support to these views.
We expect October to be a volatile month. Our previously mentioned support levels have held their first – but probably no the last – test of this seasonally weak period.
Once the markets get past this phase, will the calendar become kinder to equities? As the chart nearby shows, from the October lows until the end of the year has been a historically strong period for the markets.
But there is a caveat to that pattern: It typically comes on the heels of a weak June, July and August (gold line). This year, however, we avoided the Summer doldrums as the markets responded to significant stimulus and the end of the War in Iraq.
Without that weakness over the Summer months, perhaps we should not be overly expectant for a year end rally. Our recent call for a defensive rotation out of volatile techs and into cyclicals/industrials remains intact.
Chart of the Week:
On average, the markets in the 1990s have enjoyed year end rallies, typically from the October lows until the end of year.
Performance of Markets, by Month
This is a relatively new phenomena, most pronounced over the past decade as compared with the previous century.
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