The “September effect” – are you prepared?

Next week, September is upon us – and it brings with it just about every negative connotation traders can have heaped on them …

You guessed it – the dreaded “September effect”.

Is it a myth, or is it reality? And what can you do to prepare yourself?

Unfortunately, the market is a sensitive soul, and if you talk it down enough – it’ll fall.

And that’s just what seems to happen more often than not in September.

And – boy! – there’s some gloom being pumped out my market commentators at the moment …

Double dips, gilt crashes, and another downgrade

On Tuesday, the yields on 10-year gilts dropped to an all-time low, following warnings from MPC member Martin Weale of a double-dip recession.

The bond market is immense – and investors ignore it at their peril. What it’s telling us is that equities are in for a torrid time.

This week, we’ve also had another MPC member, Martin Sorrell, talking recessionary “shapes” – “LUV” appears to be where his money is …

Sorrell anticipates that the recovery will be L-shaped in Western Europe, U-shaped in the US, and V-shaped in the BRIC nations (Brazil, Russian, India and China).

And Western Europe took a further knock on Wednesday, with the Republic of Ireland getting a ratings downgrade from AA to AA-.

It looks like we need to brace ourselves …

In a moment I’ll look at what we should do to prepare ourselves for September – but first let’s size up our “enemy” …

Just what is the “September effect”?

The September effect is most widely identified with the US market, but is also found in the UK, French, German and Japanese markets.

Since 1929, September has been the worst single month for US stocks, with the S&P 500 losing an average of 1.3% (compared with an average monthly gain of 0.5% for the year as a whole).

September and October are traditionally considered to be the two worst months of the year, offering negative returns on average and a greater likelihood of a major crash than any other two-month stretch.

So, what happens in September that’s so awful??

Surely it can’t all be to do with coming back from holidays and the nights drawing in?

Well, September has traditionally been the month when companies admit that their yearly forecasts may have been too optimistic; and it’s often the time of the year when analysts begin to rein back their expectations. (However, these days, this information often comes earlier.)

Plus, there’s the important factor of the September effect becoming a self-fulfilling prophecy. Just as we talked about Fibonacci’s “magic numbers” last week becoming the points at which traders take their profits – so, too, many investors will take their profits off the table at the beginning of September, in anticipation of a pull back during the next four weeks.

What should we do?

Sell everything? No one – not even the best traders can consistently time the market. And by trying to get out at the top, you’re asking yourself to get it right twice – because you need get back in at the right time, or you can miss a huge swing to the upside.

Plus, if you’re thinking of selling now and buying back in November – bear in mind that dealing costs may eat up much of the benefits you’re hoping to gain.

However, if you’ve a stock that you’ve been holding on to for some time, and it’s nearing your target – you may want to consider giving up the last few points in return for releasing that capital.

Where to put your money

If our buy-and-hold equities positions aren’t going to be going anywhere for the next couple of months – as traders, it puts the pressure on us to get more from our other areas of activity.

And luckily, at Trader’s Bulletin, we’ve got plenty of great ideas coming up …

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