Ah memories. Just think, one year ago from right now we were just about ready to watch our economy, our financial markets and our collective net worth swirl seemingly into the abyss. Ah yes, memories can be, well, hideous sometimes. Still, after a tumultuous twelve months, things are starting to look maybe just a little bit better. Housing sales picked up a bit, we are told that Cash for Clunkers has goosed auto sales (although some would argue that, yes, free money will have that effect), the stock market is rising steadily, greatly confounding the purveyors of doom and apparently suggesting better economic days ahead. Yes, happy days are here again. Perhaps.
Oh sure, the CDC has informed us that 90,000 of us are simply marking time until we are wiped out by swine flu. Jobs continue to disappear (fortunately, every month the losses are "unexpectedly smaller" than feared), we now routinely measure deficits in trillions not billions ("billions, trillions, what's the difference" some may ask. For the record, one trillion dollars is equal to one billion dollars times 1,000 - let that one sink in for a moment). And many seem to be waiting for the "other shoe" to drop in the economy and/or the stock market.
But in the immortal words of that great philosopher, Alfred E. Neuman, "What, me worry?"
September - For Better or for Worse
So here we stand once again poised to "plunge" into the month of September. And "plunge" would appear to be the appropriate adjective given the results displayed in Chart 1. This is the same chart I included last week in Part 1, which displays the cumulative growth of $1,000 invested in the Dow Jones Industrials Average only during the month of September every year since 1900. It is clearly not a pretty picture.
Chart 1 - Growth of $1,000 invested in Dow Jones Industrials Average only during the month of September (1900-2009)
click here for larger view
Now the natural reaction for most folks is to either:
A) Assume that the stock market will lose ground this year during the month of September, or
B) Invoke Alfred E. Neuman once again.
Still, before either panicking or lapsing into a semi-catatonic state of indifference, it might be instructive to look at the "the numbers." Over the past 108 years during the month of September, the Dow Jones Industrials Average has:
- Gained ground 46 times (or 42% of the time)
- Lost ground 62 times (or 58% of the time)
- The average "up" September gained +3.6%
- The average "down" September lost -4.5%
- The average of all Septembers is a loss of -1.045%
Now that doesn't sound quite so bad does it. Still, Chart 1 is a pretty sick looking chart. So the obvious question is, "what will happen in September this year?" Rather than flipping a coin, let's look at another interesting September trend.
All That Glitters
While the stock market clearly has a checkered past during the month of September, the gold stock sector has enjoyed some meaningful advances. Chart 2 displays the following:
- The growth of $1,000 invested in gold stocks (Fidelity Select Gold Stock sector fund - ticker FSAGX - is used as a proxy for gold stocks) only during the month of September since (and including) 1989.
- The growth (or decline) of $1,000 invested in the Dow Jones Industrials Average only during the month of September during the same timeframe.
Chart 2 - Growth of $1,000 in gold stocks (red line) versus $1,000 in the Dow (blue line) since 1989
As you can see, gold stocks have enjoyed some serious "pops" during September, particularly in relation to the Dow. For the record:
- $1,000 invested in gold stocks only during September since 1989 grew to $2,704, or +170%.
- $1,000 invested in the Dow only during September since 1989 has declined to $723, or -28%.
So, clearly there appears to be some potential upside to trading gold stocks in September. For those who want to take closer look, one slightly more sophisticated approach is to:
- Buy gold stocks if and when ticker XAU (Gold Stock Index) makes a new 4-day high.
- Sell half of your position when the 3-day RSI exceeds 90%.
- Exit any remaining positions by the end of September.
To get the idea, Charts 3 and 4 display this strategy during 2008 and 2007, respectively.
Chart 3 - Buying gold stocks in September 2008
Chart 4 - Buying gold stocks in September 2007
Summary
So should everyone sell their stocks and mutual funds on August 31st and put it all in gold stocks? That's not exactly the message here. As always, information presented here is simply "submitted for your approval." As such, historical tendencies are simply that - tendencies. The problem with information such as what I have just described is that people sometimes get it in their heads that certain things (i.e., gold stocks rising and the broader stock market declining during the month of September) always happen. Which, as we have seen, is not actually the case. Worse, some may get it into their head that such and such a tendency is certain to happen this time around.
With the S&P 500 Index 52% above its March 2009 lows, some would argue that "a pause is due." Given September's track record in the stock market, September seems like as good a place as any for such a pause to occur.
Or not.
Jay Kaeppel
Staff Writer and Author of Seasonal Stock Market Trends
Optionetics.com ~ Your Options Education Site
Questions for Jay? Please visit "Ask the Traders" through the discussion board on the Optionetics.com home page.
NOTES:
To learn more about Seasonal Stock Market Trends: The Definitive Guide to Calendar-Based Stock Market Investing, please click here.
