After the worst month for stock performance since May 2012, stocks exited August facing what has historically been the worst month for stock performance: September. Adding to the challenge, we have multiple technical indicators lining up: predicting a correction, with stocks close to all-time highs. This combination of factors should, at the very least, give investors pause.
The Dow Jones Industrial Average finished down 1.3 percent last week and 4.5 percent for the month, while the Standard & Poor’s 500 Index fell 1.8 percent for the week and 3.1 percent in August. The Nasdaq Composite Index closed down 1.9 percent for the week and 1 percent on the month. The S&P 500 closed at 1,633, down 77 points or 4.5 percent from the all-rime high set Aug. 2.
While the decline in stocks to date has been orderly, it is clear that investor concerns are beginning to take their toll. Technical indicators started to line up, forecasting a correction for stocks before the Syrian crisis began, and stocks also began to pull back prior to the latest reports of Syrian forces using poison gas. The Syrian conflict has only served to intensify investor concerns so far.
September has been the worst performing month for stocks, with overall performance, looking back to 1950, that is net-negative, meaning if we average all years from 1950 through 2012, we get a negative average performance number. Some notable recent years were:
» 1987 (just before the October ’87 crash): -2.42 percent
» 1990 (Iraq): -5.12 percent
» 2000 (tech bubble had burst): -5.35 percent
» 2001 (9/11): -8.17 percent
» 2002: -11 percent
» 2008 (financial markets crisis): -9.56 percent
» 2011: -7.19 percent
Surprisingly, October has a net-positive average performance from 1950 through 2012, although we suffered devastating crashing in October — the 1929 crash that led into the Great Depression, the 1987 crash (-21.76 percent for the month) that saw the S&P 500 drop more than 30 percent, and the 2008 crash (-16.79 percent) after the financial crisis started (after stocks lost almost 10 percent the month prior). If we look at the two-month period of September and October, it is clear to see that downside risk escalates dramatically at this time of year.
In a recent article — Technical Indicators Lining Up to Predict Major Market Correction— I discussed the multiple technical indicators that are predicting a correction for stocks. Since that time, we have had additional confirming indicators, including the S&P 500 violating its 100-day moving average (see the nearby chart).
We are now very close to violating the 150-day moving average as well. The S&P 500 also penetrated below the 1,640 level, tried to rally back above it last week, but failed, closing at 1,633 for the week. The 1,640 level now becomes a significant resistance level, which will be difficult for the index to surpass going forward.
Friday’s jobs report will likely be the Fed’s No. 1 data point of influence at their upcoming meeting, in which they could decide to begin the long-awaited and much-publicized tapering process — cutting back on their bond purchases from the current $85 billion each month to perhaps $65 billion (to start), with further tapering to come in the near term. With the monthly average of 192,000 jobs per month for 2013, and economists’ expectations averaging 165,000, something in the 150,000 to 200,000 new jobs range should provide the Fed with justification to start to taper. A Fed trigger-pull on tapering, and/or if we strike Syria, could serve as the catalyst for a sizable correction for stocks.
Despite the recent drop for stocks of 4.5 percent from the all-time high, valuations remain inflated, with the S&P 500 trading at roughly 19 times trailing earnings. While projected valuations look a little more realistic, they are based on analyst estimates, which are always optimistic.
Given the combination of expensive valuations, the multitude of technical indicators forecasting lower stock prices, the threat of Fed tapering and a possible strike on Syria, and the historical significance of the September/October time period, investors should take note and take actions to protect portfolios from possible downside exposure.