Test of Lows May Be Catalyst
By Arnie Kaufman
Last week's bounce was encouraging, but there's no good reason to expect the rally will show more staying power than its predecessors. Economic news in the near term is likely to be mixed at best. Corporate profit estimates may come down some more. The Fed isn't expected to cut rates again before the early-October FOMC meeting, and if it did, the implication that conditions are worse than thought would probably hurt stocks rather than help them.
It may require a technical event, such as a successful test of the March/April lows, to get the market out of the doldrums. First, though, sentiment may have to deteriorate further, according to S&P technical analyst Mark Arbeter. If September and October hold true to form, says Arbeter, we could soon see a selloff that generates the fear that finally washes stocks out of weak hands and leads to a sustainable recovery.
September has been the poorest month of the year for the market over the long term, averaging a decline of 1.1% on the S&P 500 since 1926. October has frequently been the bottoming-out month. One-third of the 24 postwar corrections ended during October.
In the past, good money has been made in the period just after a bear market bottom. Three months after the nine postwar bear markets ended, the S&P 500 was up an average of 15%. Six months after the lows, the index was ahead an average of 24%. A year from the low, the "500" showed an average rise of 35%, with none of the gains less than 21%.
While further weakness may be seen in the period immediately ahead, stocks seem likely to outperform bonds and cash equivalents by a healthy margin over the next six to 12 months.
Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook