We’ve entered the month of September and markets look a little nervous.
The September/October period is usually one marked by frequent turbulence. Here I’ll run through what to expect.
Holidays are over
In the Northern hemisphere, September means that traders have come back from holidays and are revaluating the market which sometimes means there can be frequent turbulence:
o It was in September last year that Lehman brothers fell apart
o September 11 2001 was a huge tragedy in the US and also another negative for the markets
o September/October 2002 saw the market at a low due to the recession of that year.
So given the frequency of markets having a negative performance in September/October, can you blame traders for getting a little nervous now that September has started?
Talked into a correction
We’ve now seen the US market measured by the S&P 500 rise over 50% from the lows in March.
For the Australian market, the S&P/ASX 200 has risen more than 40% from the March lows.
Traders seem content to talk their way into a correction. Any trader knows that the huge rise that the market has seen in the last three months is unsustainable and a pause right now would be a healthy sign for the market.
To give you an idea of how the different sectors have been travelling in 2009 so far, here are the performances for best and worst sectors:
Info tech — Up 34%
Energy — Up 25%
Financials — Up 25%
Materials — Up 25%
Telecom — Down 12%
Utilities — Down 6.7%
Property/REITs — Down 4.4%
Healthcare — Down 1.4%
As you can see, one of the themes in 2009 so far is that the cyclical/growth sectors have outperformed and the defensive sectors have underperformed.
With markets feeling nervous, this theme is likely to be turned upside down with traders returning to the defensive sectors.
Another theme in September to watch is going to be China.
China has started to have a larger effect on the psyche of the world. The Shanghai composite lost 22% in August 2009 and now markets are concerned about whether the growth we have seen will continue or whether a curb on investment will hurt growth.
China does have a big effect on the demand and price of commodities. We’ve seen base metals up 50% in 2009 so far but a curb in investment from China could see a pull-back in this area which would hurt Australia and its large resource sector.
Long-term risk management
For the longer-term investor, you would have to question whether it is worth exiting positions given tax consequences and brokerage costs.
It does bring back into focus what you have in place for your risk management strategies.
One lesson from the Global Financial Crisis (GFC) is that a big pullback in markets can be very painful. Stop losses are a way to mitigate losses without having to watch the portfolio all day.
For the shorter-term traders, it’s an exciting time. After all, the market tends to go ‘up the stairs’ but ‘down the elevator’.
So if we do see a pullback, it could be time to make some quick profits on short positions.
Go for gold
Finally, if you are looking for the upside in this story, while September tends to be a bad month for stocks, it is usually a good month for gold.