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.