– Is September as bad for stocks as the media would have you believe?

– Is a significant correction imminent, and does the “September effect” make it more likely?

– The bifurcated market … the shoe may be moving to the other foot.

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September, bad for stocks? The truth will set you free.

The freedom I’m referring to here is the freedom from worry. Here is the truth about September in the stock market for the past nine decades:

“September is usually one of the worst months of the year for the stock market, but shares do better at times when they have already done well. Over the years dating back to 1928, the average September return for the S&P 500 has been a loss of 0.99%. That makes the month far worse than May, which ranks second in providing gloom for investors with an average loss of 0.11%.” (Barron’s (9/1/2021)

Hmm. If the worst performing month was down less than one percent on average and the second worst, May, was only down 11/10s of one percent what am I worried about? If you are worried it is because your media sources did not bother to give you this information, choosing to scare you into giving them your undivided attention rather that educate you. Bad news sells.

Kudos to Barron’s for following up with this little piece of information:

“History indicates that September 2021 could be a good month for stocks. In the years since 1928 when the S&P 500 rose by more than 13% for the first six months, the index’s median September gain was 1.4%, according to Fundstrat. Through June this year, the broad market benchmark rallied 14%.”

Many continue to warn a significant correction is ahead

Since market corrections and worse always lie ahead, I cannot challenge this assertion. I just cannot predict the next one. Also, since the beginning of the republic, the markets have been in a gradual uptrend, punctuated by bad setbacks from time to time so it is hard for me to trade real or imagined potential setbacks.

I might point out that a significant correction may have already taken place in the market (under the surface) even in the face of a succession of new all-time highs for the S&P 500 (SPX).

“(Mike) Wilson explained that while the broader S&P 500 has failed to correct more than 4% since March, 56% of the companies within the index have seen a drawdown greater than 10% since May 1. Sectors including energy, materials, discretionary, and financials have seen the greatest percentage of stocks with corrections over 10%, he noted.” (Mike Wilson-Morgan Stanley chief equity strategist quoted in Business Insider)

I might point out that while a large group of stocks in the S&P 500 have had greater than 10% corrections the index itself is only off its all-time high by less than 2.5%. I call this discrepancy a return to the “Covid Playbook” [when in doubt, and there are plenty of things to be in doubt about (as is always the case), sell cyclical, sell old economy and buy growth, tech and innovation]. My personal belief is this playbook is getting a bit long-in-the-tooth and we are beginning to see it crack. This was the case this past Friday when the Dow (-.48%), S&P (-.91%) and Nasdaq (-91%) all closing lower with the Russell 2000 (+.18%) ending the day in the black. In other words I see big tech losing its luster in a market full of liquidity looking for shinier objects to play in value, mid-cap and small cap.

Meanwhile, it is not just Mike Wilson out there waving red flags. The choir has many voices.

‘Take those profits’: Strategist says extreme market moves are on the horizon  (CNBC 9/17/21)

• Paul Gambles, co-founder of investment advisory firm MBMG Group, says investors should consider significantly building up their cash positions.

• Jim Cramer (9//21) “We’re in a treacherous moment here.”

No Wonder the AAII numbers for the week ending September 15, showed bullish sentiment plummeting to the lowest level since July 29, 2020. This week’s number for bullish sentiment came in down 16.4% from the previous week at 22.4%, well below the historical LOW average of 28%. This level of fear is pretty constructive it my book.

The bifurcated market may be at an end

A bifurcated market, divided into two branches, haves and have nots, large cap growth and technology, may be ending. “Big Tech” versus a vast majority of stocks not in that arena or capitalization level may no longer be the way to outperformance. If this is happening it will negatively effect those indices heavily weighed in “big tech” or tech in general. Those stocks may not perform as well but under the surface of that underperformance a lot of good things will be happening in value, mid cap/small cap value and growth. The arts of stock picking and active management may reemerge.

To wrap up, the numbers presented above regarding stocks that have already gone through corrections would indicate that additional corrective action, that many have been calling for, may not be needed for the vast majority of stocks. Yes,” big tech” may be vulnerable but that is not the end of the world. It would certainly be normal and expected if this were to happen. The huge number of talking heads screaming for correction is also healthy as they, as usual, will be wrong (or they may get lucky vis a vis the stopped clock effect … they are right at least twice a day). Finally, negative  sentiment would appear to line up well  as a key ingredient for a significant rally in most stocks.

“It isn’t China”

I post these statements in full knowledge of the situation at Chinese developer Evergrande (EGRNF) and the overnight buzz of the potential contagious nature of this company’s problems. CNBC has already begun the chant–Evergrande, the first domino to fall. My sense is the Chinese come up with a  solution this problem that will not bankrupt the world.

What’s your take?

First we have to steel ourselves for October, the cruelest month …and the media feeding frenzy it will spawn.