October. Crash.
The two words seem forever linked in investors’ minds. And yet, there is no reason to believe the market will crash in the month ahead.
Let me repeat: There is no reason to fear a crash. In fact, there are actually very good reasons to believe September is the start of a new bull market. Here’s are six of them:
Reason #1 – We’ve Already Hit the Technical Bottom
During the bear market, Wall Street made three significant lows. On October 10, 2008, stocks bottomed out, then reversed intraday on no news. I like to point to this day because it marked a particularly interesting milestone: That was the moment Oprah Winfrey personally became worth more than the soon-to-be-bankrupt General Motors (GM).
Then on November 20, 2008, we hit another significant low right before the holidays. We saw a rebound into Thanksgiving of last year that was the best bounce for the Dow since 1932.
But then the wheels fell off a third time, and we set the March 9, 2009, lows: A close of 6,547 for the Dow and 676 for the S&P 500. But it’s important to note that this final low was largely a low among financial stocks. What precipitated the deep declines was that the week before, U.S. Bancorp (USB) and Wells Fargo (WFC) cut their dividends and sold off. Intraday, Citigroup (C) actually traded for less than a dollar.
Let’s face it: Financial stocks had to bottom out eventually after the financial crisis. We needed a change of leadership in the market. Shortly after this low was set, Citigroup was booted out of the 30 Dow components. So was GM. The indexes suffered as the financial sector suffered, and after these companies hit the floor, there was finally support for the broader market.
I must point out that three is the magic number here. Making three significant lows over a short period of time — several months — is a very important development. That’s exactly what happened back in 2002 to 2003, the last major bottom we had. We had a low in July of 2002, October 2002, and finally March 2003. So just like then, I am confident we exhausted the bottom-making process with our three dips in the past year or so.
Reason #2 – There’s a Whole Lotta Short Squeezing Going On
Here’s a second reason I don’t see a crash coming. We had this incredible short squeeze in March. And stocks like AIG (AIG), Fannie Mae (FNM) and Freddie Mac (FRE) had this incredible rally essentially from March 10th into early April. Then some of them just consolidated in a heartbeat.
Then they had a second short squeeze from August 3rd into the last Friday of August. In fact, financial stocks bounced over 200% in that squeeze.
Short squeezes and short covering are how bear markets end, because people betting on the downside get wise to the recovery and have to cover their behinds. This is a great sign for the bulls, since it means contrarians are finally coming around to their camp.
Reason #3 – The Cream Has Started Rising to the Top
A lot of low quality, low-priced stocks have done better since the last low. This can make things look confusing for investors. But things began to get clearer on September 1st. What happened on September 1st is that AIG, Fannie Mae and Freddie Mac corrected more than 15% that day. The average financial stock was down over 5%.
There seems to be a shift away from these low-quality stocks to quality stocks. The low-quality always leads first, as bargain hunters bid them up, but these stocks can’t sustain the gains and then flame out. That’s when the cream rises to the top. That exactly the phase we’re in now.
Reason #4 – Less Cash on the Sidelines, More Money Moving to Bonds
A lot of investors went to cash last year, and they are coming back now. I watch the flow of funds on Wall Street very intensely. Since January, bond mutual funds have captured a tremendous amount of money. There were extraordinary high bond yields out there for corporates and munis recently.
Bonds typically lead stocks in luring investors who were in cash back into the market. But as bonds lose favor, investors become increasingly drawn into equities.
In short, the institutional flood gates are about to open up and push Wall Street higher.
This has already started. The stock market’s been capturing a flow of funds in the mutual fund industry since April. As yields go lower, more money will go to stocks.
Reason #5 – Seasonality Is Not a Factor
Seasonality is often stated as a reason for the market dropping in September and October. But that just isn’t a problem this year. September through May should welcome an avalanche of good news simply due to ridiculously favorable year-over-year comparisons.
Remember how bad the fall of 2008 was? When you compare the current conditions, things look pretty good, don’t they?
We have a legitimate business recovery underway, but the question is, “Will consumers join the party?” Based on August retail sales, it looks like they are. So I’m very, very encouraged here.
What’s more, the weak seasonal periods that you used to see mostly in September and October were distorted in the old days, but no more. Analysts used to hype stocks at the beginning of the year and slash their estimates at this time. Analysts aren’t allowed to hype stocks anymore. It’s something to do with Mr. Spitzer and all the scrutiny on them…. So I don’t think we have to worry about the seasonality factor at all.
Reason # 6 – Wall Street WANTS to Rally
Finally, I’ll leave you with this: The next time it’s a tough day for the market, check out the last two hours of trading. Stocks may get battered early, but the indexes almost always up late in the day, because money’s coming in and snatching up stocks on the dip. That means buyers are out there and they’re eager. That means Wall Street WANTS to rally.
So I’m very encouraged. The market does not want to go down. The flow of funds to the market is increasing. Seasonally, everything is going our way.
In a nutshell, don’t fear a market crash. It’s up, up and away!
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