The Best September for 70 Years

So here we are on the last day of September 2010 and the market has just closed. It turns out that not only was this the best monthly performance for the stock market of the past 15 months but it was also the best September performance for 70 years! Who would have "thunk"?

Going into September the market sentiment was extremely negative (I for one was very bearish and remain so), in fact it was so negative that any form of a rally would squeeze the life from the shorts. For those of you less in tune with trading jargon that means that the people that were betting on a market capitulation would be forced to reverse their positions driving the market higher as they rushed for the exit. It appears that this is exactly what happened.

There was not a lot of conviction in the move as the volumes for the month were not overly bullish, but the market just kept on churning north. Each day as the market continued higher more shorts were squeezed and this drove prices even higher. A closer analysis of the move shows that certain sectors of the market did the lion's share of the work. Industrials, consumer discretionary and technology were all up over 10 percent while finance and utilities although still up were a drag on the overall performance.

So where are we now? I still feel that the train wreck will happen in the near future. Quantitative easing signals have driven yields back to their lows, unemployment remains stubbornly high, consumer sentiment remains in the doldrums (with the holiday shopping season just around the corner), housing is still weak, banks are still struggling and the dollar is being pounded. This is not a macro picture that lends itself to being overly bullish so I am sure that most money managers will trail the September index return by a significant percent.

However, with the elections coming in November the rally could continue through the end of the year. I am cautiously pessimistic on this view and expect to see a violent pullback at some point in the near future particularly if consensus starts to shift to the bullish camp en masse. Trade cautiously and enjoy the prosperity while it is upon us.

The End of the Recession

So the recession is officially over, but tell that to the millions of unemployed Americans. Furthermore there is more than a fair chance that another round of quantitative easing will happen in the very near future. Certainly it is not "normal" for more stimulus to be required when the recession is over but maybe that is me calling a spade a spade.

Having just returned from a visit to China (the main reason that my blog went silent for a while) I can tell you that there is a stark contrast between our recession ended economy and their in full flight economy. Without a doubt they still have a way to go and the divide between the haves and the have nots is widening (which is particularly worrying), but there is no reason that I can see why in a couple of decades their economy will not be at least on par with the United States.

How the next few decades are handled politically on both sides of the Pacific will have a massive impact on the global economic landscape for the rest of the millennium, This will be very interesting to watch but as my long term view is of significant Chinese growth I am still a firm believer in investing in China.

To be sure there are numerous pitfalls with investing into China and Chinese stocks. The one that jumped out at me during my trip was that growth at the expense of cash flow and shareholders (through dilution) seems to be the norm. As a shareholder this does not please me in the least so I will be extra vigilant to ensure that the companies that I invest in have their shareholders at heart. I would advise that you do the same.

Zweig Breadth Indicator

This is an indicator that was developed by Dr. Martin Zweig. The Breadth Thrust Indicator measures market momentum. I will not go in to how the indicator is calculated but suffice it to say that the "Breadth Thrust" occurs when during a 10-day period the indicator rises from below 40% to above 61.5%. This indicates that the market has rapidly changed from an oversold condition to one of strength but is not yet overbought.

According to Dr. Zweig there have only been 14 of these thrusts since 1945. Each time the thrust occurred the market rallied significantly and the average gain in the market was 24.6% over the next eleven months. In fact most of the best bull markets start with a Breadth Thrust.

I always check this indicator and as of Friday the indicator closed at 61.3% in only eight days. This is within a whisker of fulfilling the indicator requirement which may be achieved on Tuesday. Should this occur it appears that the market will enter a year long bullish phase with significant upside.

This certainly goes against what I expect so I will be monitoring the indicator very closely but it does appear that there is a fundamental shift happening in the market. The bond market appears to be rolling over which could lead to additional gains being made on the long side for the foreseeable future. Furthermore there is a chance that the market rallies for the next year based on more quantitative easing from the Federal Reserve. This could place a temporary support under the housing market and risk aversion could reignite the market to rally.

While it is still my contention that all of this will still be a short term fix to a long term structural problem, if you are trading and are expecting a market collapse (as I am) this indicator could be pointing the way and it is in the opposite direction. Do not get too wedded to your opinions as if the market does rally 25% from here there will be a lot of pain to be felt if you are short.