Q3 Commentary: Best September Since 1939!

September 2010 Market Commentary

The major market indexes scored a sound follow-through day (FTD) on September 1, 2010 and spent the rest of the month racing higher. This corresponded with a steep sell off in the US dollar and a robust rally in many well-known commodities. The benchmark S&P 500 index and the Dow Jones Industrial Average both soared last month and enjoyed their best September since 1939, rallying 9% and 8%, respectively. The tech-heavy Nasdaq composite led its peers, surging a whopping +13% last month. For the year, the Dow Jones Industrial Average and the S&P 500 index are both up just under +3%, while the Nasdaq Composite is leading the major averages with a +5% gain.


Before we address the current market outlook, it is important to step back and put the recent action in proper context. Since the March 2009 bottom, the major averages have experienced explosive gains on the simple premise that the global economic recovery will be robust. That notion helped the benchmark S&P 500 Index rally +83% before reaching a near-term top of 1,219 on April 26, 2010. Since then, notions of a robust recovery have come into question, especially due to the ominous debt levels in several European nations coupled with a high rate of unemployment and a slowing economic recovery in the US. The summer sell off sent the major averages down –11% to -18% from their 2010 highs before bottoming in early July. The euro, which has also enjoyed healthy gains since March 2009, topped out in December 2009 and has steadily fallen during the first half of 2010, then rallied smartly off its multi year lows in July and continued advancing last month. Looking ahead, it is imperative to monitor the direction the euro is heading in order to better gauge investors’ world-wide collective appetite for risk.   

Bullish Case: Stocks Are Strong!

History shows us that most bull markets last between 18-36 months before they fail. Therefore, the fact that we are only beginning our 18th month bodes well for this bull market. It is also somewhat encouraging to see nearly every government across the globe step up and unanimously infuse an unprecedented amount of capital into the global economy and more recently, reiterate their stance in recent months to infuse more capital if needed (which are now known as quantitative easing 1 and 2). This unified action saved the global economy from entering a deeper recession and laid the foundation for this massive bull run. On average, central banks around the world are still keeping rates near historic lows to help spur economic growth, while a few have begun raising rates. As of this writing, the major averages continue are racing higher and managed to negate a massive head and shoulders topping pattern, breakout of a smaller inverse head and shoulders pattern, and trade back above their 50 and 200 DMA lines. As long as these levels hold, the intermediate and longer term picture remain somewhat positive. This robust rally will come under pressure if the major averages encounter a series of distribution days or if they fall back below their important moving averages.  
It is also very encouraging to see the bulls show up and continuously defend support. Since the April 2010 highs, the major averages have pulled back a handful of times, each somewhat mild, not exceeding the -20% level which technically defines a bear market. Therefore, until the major averages pullback over -20% from their recent highs this could be interpreted as a temporary correction, albeit a steep one, before the bulls again return and resume this powerful uptrend that began in March 2009. A characteristic of this bull market and others is that every time the market pulls back the bulls promptly show up to quell the bearish pressure and defend support. That said, until support is breached, the bulls deserve the bullish benefit of the doubt. 

Bearish Case: Debt & Unemployment Are Still A Concern

Sovereign debt woes and tepid economic growth continue to be the bane of this rally. Since the April 2010 highs, several popular rating agencies have downgraded a slew of European nations and financial institutions’ debt. Not surprisingly, this corresponded with a steep sell-off in the euro which sent it down to fresh 4-year low earlier this summer.  Italy, Hungary, Portugal, Greece, Iceland, and Spain are some of the European nations which analysts believe are dealing with onerous debt levels. All of this helped gold and bonds race higher as the so-called “safe haven” trade. Gold prices surged to all-time highs last month as the US dollar fell.
The bears believe that the effects of the massive worldwide stimulus packages from 2008-2009 are beginning to wane and the future of the global economic recovery may not be as robust as initially expected. The bears also claim that technically this rally is done and overdue for a serious intermediate-term correction. Since the March ’09 lows, the major averages have retraced (rallied back) a little over +50% of their 2007-2009 bear market decline, which is a fairly typical bounce before a new down leg ensues. Only time will tell exactly how this plays out.
Market Action:  Price & Volume B+
As we know, the major averages topped out in October 2007 and then proceeded to precipitously plunge until they put in a near-term bottom in early March 2009. Since then, the market snapped back and enjoyed hefty gains which helped send the major averages to one of their strongest 17-month rallies in history. The small cap Russell 2000 Index was the standout winner, surging a whopping +117%. The tech-heavy Nasdaq Composite is a close second, having vaulted +100% before reaching its interim high of 2,535 on April 26, 2010. The benchmark S&P 500 Index raced +83% higher before hitting its near term high of 1,219 on April 26, 2010, and the Dow Jones Industrial Average soared +74% before printing its near-term high of 11,258 on April 26, 2010.  
This data indicates that Monday, April 26, 2010 appeared to be a very important day for the market because that is the day that most of the popular averages printed their near-term highs and negatively reversed by closing lower from new recovery highs. In addition, after such hefty moves, the 11-18% pullback was healthy enough to help shake out the weak hands and send the major averages higher last month. However, if the 2010 lows are further breached, then odds will favor that even lower prices will follow. Allow us to be clear, last month’s action was robust, very healthy, and suggests the bulls are now back in control of this market. Trade accordingly. Never argue with the tape, and always keep your losses small.  

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