Best September since 1939

What a September it’s turning out to be! With only two trading sessions left, the Dow is up 8.4% for the month.

Assuming that the market remains this high at month end, it will go down in the record books as the best September in more than 70 years. You have to go back to 1939 to find a September with a bigger percentage increase: In September of that year, the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,810, -48.52, -0.45%) produced a 13.5% return.

Given September’s reputation as being by far the worst for the stock market, there are any of a number of important investment lessons to draw from the stock market’s surprising strength this month.

The first: Averages are not guarantees, even when those averages are as statistically significant as September’s has been. This might strike you as utterly obvious, but it’s worth repeating nonetheless. That’s because it’s all too easy when focusing on averages to gloss over the large variance in the individual results.

For example, even though September has been an awful month on average for the stock market, the month has nevertheless produced a gain 42% of the time since the Dow was created in 1896 (in contrast to a 59% gain rate for all other months). Despite being on average a loser, in other words, the stock market in the past has still risen in more than 4 out of every 10 Septembers.

This leads to a corollary: In order to get your odds of winning as close as possible to 100%, you need to bet on a pattern many times.

Imagine being a card counter in blackjack. If you’re a good one, the odds of your beating the casino eventually become tilted in your favor. But, no matter how good you are, you still have no guarantee of winning any given round. The only way to get any reasonable assurance of winning is to play many rounds.

How many? The rule of thumb I remember from Statistics 101 is 30.

What this means in the case of September: Assuming the future is like the past, you have good odds of being a winner only if you were to bet that the stock market will on average be a loser during the next 30 Septembers.

That’s an awfully long time to wait if you’re interested in instant gratification. But what we want, and what the odds are objectively, are two very different things.

This leads to yet another corollary as well: One data point, even an outlier as impressive as the stock market’s gain this September, does not make a pattern. Nor can it reverse a long-standing trend.

Another important lesson has to do with how past success can sabotage a stock market pattern. If enough investors know about a pattern, they will try to get a jump-start on it and, in the process, cause the pattern to disappear.

This may be one of the reasons why August produced a loss for the stock market, despite historically being one of the better months. It’s entirely possible that many traders sold stocks in August in order to sidestep September, thereby transferring September’s loss into August.

The bottom line? Extrapolating the stock market’s past into the future is tricky at best: Even when a previously very strong pattern hasn’t been discounted away by shrewd investors, there is no guarantee that it will work the next time around. And when it doesn’t work, there is no way in the moment to know if the pattern has permanently stopped working.

In the meantime, though, we can all celebrate the unexpectedly good news that the stock market has brought us this September.

Wall St expected to lift this week

NEW YORK - If the US Federal Reserve's view of the economy brightens by just a glimmer next week, it could push the stock market above its four-month trading range.

The S&P 500 closed the week at the higher end of that range, just below 1,130. Some chartists see a break above it as presaging a test of the year's highs.

But options trading suggests some see 1,130 as the market's ceiling and are protecting their portfolios against a decline.

Other investors see the Federal Open Market Committee policy meeting as the turning point that stocks have been searching for to break out of the range with conviction.

"Going up to the close on Tuesday, we could see a little bit of enthusiasm, and perhaps it could be the catalyst that could push us above 1,130 on the S&P," Wells Fargo Funds Management chief portfolio strategist Brian Jacobsen said.

In late August, Fed chairman Ben Bernanke said he would need to see a significant deterioration in economic conditions before easing monetary conditions further. Recent data, including a stronger-than-expected reading on private-sector jobs growth, could prevent further action from the Fed.

If the Fed does move, people "wouldn't interpret it as a bad sign (for the economy) but as the Fed being vigilant in trying to keep this recovery going," Mr Jacobsen said.

Most analysts don't see the Fed moving in that direction immediately, but Mr Jacobsen said any signal will be welcome.

"It could be the impetus that's needed to push people out of bonds and into stocks, finally," he said.

All eyes on technicals

Even with stocks losing a bit of momentum as some technical indicators suggest, the S&P 500 seems poised to move above 1,130. Some chartists see breaking that level as a harbinger for future gains, with overhead resistance not seen until 1,173 and then at the year's high near 1,220.

Having pierced 1,130 three times in the last three months, the level is garnering attention even from investors who are more focused on fundamentals than technical analysis.

"Whenever economic uncertainty bubbles up, that's when technicals take over in terms of what market participants look for," USAA vice president of equity investments Wasif Latif said.

"A lot of people have been looking at 1,130 and we look at it as a component because other people are acting on it."

For the week, the Dow Jones industrial average gained 1.4 per cent, while the Standard & Poor's 500 Index advanced 1.5 per cent and the Nasdaq Composite Index jumped 3.3 per cent.

Options traders hedging bets

The CBOE Volatility index, or VIX, continued to show high volume as investors were bracing for volatility.

"After VIX September options expired on Wednesday, I expected that index options activity to drop," Schwab Center for Financial Research director of trading and derivatives Randy Frederick said.

"But on the day, there was actually a big volume on puts and calls, suggesting that as soon as September contracts expired, they replaced the VIX contracts again for protection."

A large put spread was made on the S&P 500 index that suggested a substantial move lower in the short term, according to Chris McKhann, analyst at optionMonster.com.

Housing data all week long

In terms of economic data, next week's schedule has a daily dose of housing indicators. From the housing market index on Monday to housing starts on Tuesday, followed by existing home sales on Thursday and new home sales on Friday, investors will be able to get a clearer picture of a key sector that must improve before the economic recovery can really kick in.

"It's been so terrible lately that it doesn't have to be strength – just a sign of life in the housing market could be support for financial markets overall," Mr Jacobsen said.

DowJones index and bulls

Double Dip rumors wiped out

Double dip rumors wiped out by DowJones index CFD evolution, value index (10.4xx) that is very close from the open of the year (10.443) and also close from the open value of the month of August(10.514) value that if is pasted by the end of September, will develop a engulfing pattern, in a bullish trend wich means will be future bullish evolution.

DowJones CFD numbers evolution

Source : www.tradeville.eu platform

DowJones CFD chart evolution

Source : www.tradeville.eu platform

In Q3+Q4, Bulls will come back in markets

DowJones Index has less then 200 points to punch the bearish trend started in May 2010 and put bulls back to work, plus RSI indicator is helping (now at 58.245) because has more than 10 points untill overbought value.

DowJones index evolution

Source : online.wsj.com

Tehnically we are not that far from a bullish market, and fundamentals are helping to, from 35 reports that will come next week and influence the markets, 24 are forecasted better than last, wich means that fundamentally if analysts are not wrong , we have 68.57% chance to brake that bearish trend.

Report written by Scuturici Petru-Alexandru
ConfidentTrader Member Club

Monday

Tuesday

Wednesday

Thursday

Friday

Time is set by Romanian clock source: www.forexfactory.com

news and reactions