Market Update - September 1, 2010

The Markets had a great day today as we finally mostly upbeat economic news. The ADP Employment Change showed private sector jobs lost -10k when expectations were to gain +15k. However, the ISM Manufacturing number came out above expectations, which surprised many including myself as all the regional Fed numbers were showing declines.

The big story in my opinion was positive manufacturing growth in China coupled with good economic data out of Australia eased investors fear about America and Europe.

Also, the polls are showing some of the lowest ratings for the Obama administration and the Democrats on record, even lower than Bush 2 (Google Crystal Ball), which should and seems to be bullish for the markets. Investors also believe out of desperation there will be more stimulus to follow.

Investors were just starving for some good economic news and latched onto the positive and dismissed the negative.

It is only the first day of the month and we need to measure mathematically and statistically the odds in order to assign risk. The Dow Jones Industrial Average was created in 1896, and since that time the month of September has lost on average -1.15%. September historically is the worst month out of all 12 months.

In fact, if you break it up by decades, September has been dead last 1/2 the time versus all the other months, and has never been above 9th. So it is in the bottom 1/4th every decade since inception over 100 years ago.

Two other statistical facts are momentum going into September and the volatility. September lost over 2.5% whenever the stock market was down in August and was down for the 1st eight months of the year. August was down and we are down for the year.

A lesser significant fact is when the level of the Volatility Index is below 20 at the end of August, September usually has better returns for stocks. When the VIX is was above 20 going into September, returns lost an average -2.8%.

The politics are bullish for the markets, but the historical and statistical are bearish. All I know is the risk is elevated and it is time to be cautious. We are still in a range, and until we get more definitive evidence, I will remain conservative.

These are my thoughts for today.

Keep studying,
Dan Stewart CFA®

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