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Looking Ahead With "The September Effect"


First week of this month better indicator than January.


Watching water spill over the levies in the Ninth Ward in New Orleans was spooky stuff - it looked like a small wall was holding back the entire ocean. I find it miraculous there wasn't a breach.

There is no doubt the White House blew it big time with Katrina and its aftermath. That event will rightfully go down as a dark spot in American history, but I feel this time around everyone handled the storm much better. Thank God.

The Market

Over the years, a lot has been made of the so-called January Effect, which is supposed to be a fairly accurate indicator of how the entire year will fare based on the results of the first week of trading in a new year.

I think there was a more definitive correlation with the first week of trading and the entire year until the press started to play up the "effect." Now I'm not so sure.

My firm has an indicator that it believes to be more succinct in predicting the next 12 months. We call it the September Effect, where the first week of action in September serves as a spot-on harbinger for the next full year of trading.

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Last week traders were told to ignore the action as volume was too thin. So those 200 point Dow trading sessions were just examples of how exaggerated the market could be when everyone has gone to the beach.

Going back to 2003, if the market is up or flat in the first week of September, it's also been higher for the next year. Conversely, when the first week of last year saw stocks lower by 1.7%, the next 52 weeks were difficult and saw the market tumble 12%.

So we can write off last week but I think this week is going to be very telling indeed.

Source: Wall Street Strategies

This week has the right mix of economic data for the market to make a meaningful move. It all cumulates with August jobs data, which is expected to see a net loss of jobs for the seventh time this year (every month).

The general consensus is for a loss of 60,000, which would be well under the average in typical recessions, but not great news by any stretch of the imagination beyond psychology. I would suspect the market will be in a tight trading range until Friday although the bias could be to the upside for a couple of reasons.

  • Last week economic data releases were surprisingly better than expected.
  • Crude oil looked vulnerable ahead of Hurricane Gustav and completely collapsed yesterday.

Economic Data

In addition to the jobs picture all eyes are going to be focused on ISM data (manufacturing and services), Auto Sales and Productivity, just to name a few. Here's a list of what's going on from the 2nd to the 5th this month.

The S&P 500 is positioned to make a major breakout with a close just north of 1,300 on convincing volume. Through that point the index has a pretty clear shot to 1,440, which to me is the big breakout point for a long term rally.

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No positions in stocks mentioned.
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