After Awful August, Investors Fear Scary September Is Next

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October may be the month with the most famous market crashes, but historically September is the worst month of the trading year. Since 1950, the DJIA and S&P500 underperformed in September, and the NASDAQ composite since 1971; a triple-crown of grim returns suggesting stock bulls have few places to hide this month.

After watching the DJIA slide 4.4%, the S&P 500 down 5.7%, and the Nasdaq down 6.4% in August, does this ugly performance auger poorly for the next 30 days? Jeff Hirsch, the editor of the Stock Trader's Almanac, isn't optimistic.

"It opens up well. The first trading day of September is strong, the day after Labor Day is strong, but then it fades as we get towards (options) expiration. It doesn't help adding into the mix that this is a seasonal tendency," Hirsch explains.

But the skepticism isn't based entirely historical data. The author of "Super Boom" says the market faces severe headwinds from investor psychology, economic fundamentals, and "grim" charts. For those who took the last three months off, the specific concerns for each of the respective portents of doom are as follow:


Psychological: Hirsch describes investors as "traumatized." The potential for a European collapse, dithering in Washington, D.C., and an unprecedented downgrade of US debt are the particulars for 2011. Add to those the fact that the market has fallen into a pattern of slowly climbing higher then quickly giving up the gains, and you have a situation where the only market participants with confidence in stocks are those who haven't been paying attention.

Fundamentals: The economy grew at 1%, give or take, for the 1st half of 2011. Earnings are expected to grow at double-digits for the next 12 months. History would suggest the markets will eventually have to accept slower growth or the economy will have to improve; we can't have it both ways.

Technical: Three words: "Bearish. Death. Cross." The rally of the last week is running headlong into strong overhead resistance. In English: Buckle up, baby. Watch specifically for the neckline resistance on the DJIA between 11,600 - 11,900.

The other side of all the above is that "it's in the tape". If the economy was going to grow in the 3rd quarter before Irene, and it wasn't, it's certainly not going to pick up now. When the worst is expected, an upside surprise is an eventual inevitability. Traders have come to resemble dogs that get beaten everyday; anything better than flat-out abuse seems terrific.