ETF Periscope: September’s Song: Off-Key or On-Pitch?

September's Song: Off-Key or On-Pitch?

by Daniel Sckolnik of ETF Periscope

“The pendulum of the mind alternates between sense and nonsense, not between right and wrong.” ~Carl Jung

The first notes of September’s song can be heard loud and clear, and so far it sounds a lot like the mating call of the Bull.

Like an opera singer fending off the flu while gamely trying to perform an aria, the markets staggered into September, reeling from an August so shrill it was the worst since 2001. Mainly in response to a steady stream of negative economic data and dour consumer sentiment, the Dow Jones Industrial Average (DJIA) ended down 4.3% for the month. The benchmark S&P 500 Index hit a succession of sour notes as well, off 4.7%. The Nasdaq composite was even more off-key, losing 6.2% for the same timeframe. Percentage-wise, the leader of this “big band of bad” was the Russell 2000 index (RUT), down more than 10%, its worst August rendition since 1998. The RUT, a compilation of small capitalization stocks, is often regarded as a leading indicator of the economy in general. As such, it wasn’t exactly trumpeting the tune “Happy Days Are Here Again.”

Perhaps, however, that melody might be reverberating a little louder across Wall Street’s stage, at least for the moment. The last four sessions of the week were all hitting the same note, and it was definitely on the sweet side.

The DJIA ended the week at 10,448, up almost 3% on the week. Just like that, the Dow found itself back in the black for 2010. Likewise, the S&P 500 sat higher up the charts by over 40 points. It seemed as if not-so-good news was seen as being not so bad by investors. Fifty-four thousand jobs were lost, according to the Labor Department on Friday, not normally regarded as a good thing. But when expectations were more along the order of over 100,000 jobs gone, it seemed like an invitation for the markets to party, and the Dow shot up over 125 points on the day. In addition, the announcement of an unemployment rate pegged at 9.6% seemed to harmonize well with the Street’s consensus estimate for that category. Taken together, these numbers were viewed as a good thing, at least as far as investors were concerned. Not so much, perhaps, as by those whom the statistics were actually based upon.

So is the choir now singing Hallelujah at a clear trend in the upper register? Has investor sentiment shifted as of late, a key facet of how the noise of news is perceived by the markets? Is this the start of the next leg up?

There may be some technical evidence to justify that position. If you look at the year-to-date chart of the S&P 500, you might notice that the 1040 mark has served as a clear support level on three separate occasions during August’s dark days. Going back even further, that same level has served the same purpose post “flashcrash,” back in May. True, the level was severely breached for an entire week back in July, but since that time period the trendline has been towards the upside, though with a somewhat jagged edge.

Still, the S&P 500’s current level of about 1100 is in limbo in so many ways. First off, it sits pretty well dead center of both its 50-day and 200-day moving average. Second, that same number is at a point approximately equidistant between both its low and high point for the year. So, as noted by many, it has really been a sideways market this year, with lots of false notes sounded in both directions. It has been, then, if anything, a traders market as opposed to an investors market.

So what tune should you be dancing to for the month of September?

It is a little early to say, as the first week still featured a comparatively light volume of trading, compared to what might be expected to come. The first wave of post Labor Day sessions will probably set the tone a lot clearer then this past week. Playing a defensive position would not be a bad thing, considering that September has had more than its share of bad turns in the last decade. This could be accomplished a number of ways. You could decide to buy Put options on some of the major indexes, such as SPY (SPDR S&P 500 ETF Trust), IWM (iShares Russell 2000 Index Fund) or DIA (SPDR Dow Jones Industrial Average ETF Trust). If you’re not big on options, you might prefer to short one of the ETFs themselves.

Another hedge play would entail buying one of several gold ETFs, such as GLD.  This is another option worth exploring, as the past has seen a reverse correlation between the markets in general and gold in particular. However, in the case of gold, that historical relationship appears to have been altered to some degree over the last year, and now the precious metal sometimes moves in tandem with the broader markets. As always, doing your homework and talking with a good advisor is generally time well spent. So spend it well, and often.

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

ETF Periscope
daniel / Tag: DIA, DJIA, Dow Jones Industrial Average, GLD, IWM, RUT, S&P 500, SPY, Wall Street /