What You Should Know About September

  • August 27, 2003
  • Rob Hanna

Is it the end of the summer
already? It seems like it just began. Maybe that’s because the S&P
500 is trading at nearly the exact level it began the summer at (995.69 close on
Friday June 20  vs. 996.79 today). So if you’ve spent the summer on
the beach, and are just getting back to your computer…you didn’t miss much.

While the S&P 500’s trading range has lasted the whole
summer, the last 2 ½  months haven’t been a total wash. I believe that the
market has started leaving us some clues about its future direction. Activity
should begin to pick up next week as Wall St. workers return from their summer
vacations.  While there is no way to know for sure what to expect after Labor
Day, I’ve broken down my thoughts below.

Positive

  1. Foreign markets – Foreign markets have charged
    ahead over the last several weeks.  New highs were hit in many Asian and
    emerging markets.  This is a positive for the U.S. markets and could help
    to lift them higher.

     

  2. New highs vs. new lows — Mark Boucher’s new
    low list has been virtually non-existent.  The new high’s list has had
    some good readings but has been inconsistent.  In a low-volume, range
    bound environment I’m counting this as a positive.

     

  3. My expanding watch list — In my July 30th article I discussed
    how my watch list was shrinking and why this concerned me.  Over the last few
    weeks I have seen a large number of new stocks form solid basing patterns.  This
    indicates to me that if the market did break out, there is plenty of opportunity
    for fresh leadership to emerge and help ignite a good rally.

     

  4. UUWNHI (Unofficial, Unscientific, Working/Not working Hanna Indicator) —
    Breakouts to the downside that have occurred have had poor follow through. 
    Shorting breakdowns has remained a tough business this month.  Breakouts to the
    upside have been more abundant, but with less than stellar results.  While
    follow through in these breakouts has not been nearly as strong as last Spring,
    you wouldn’t expect explosive follow-through when volume on the exchanges is so
    light.  Pullbacks seem to be working very well lately.  I have noticed several
    stocks find support near their 50-day moving averages, which indicates
    institutional support.  Overall, I’m calling the UUWNHI a net positive for the
    market this month.

     

  5. Accumulation/Distribution — There has not been
    a single distribution day for the Nasdaq or S&P 500 in the last two weeks.  In that time I have counted 2
    accumulation days for the Nasdaq, and 3 for the S&P.  This hints at net buying
    by institutions.

Neutral

Sentiment Indicators — While the percent of bullish vs. bearish
investment advisors is still overly bullish, I’m seeing several other sentiment
indicators that lead me to believe there is some fear in this market. 
The ratio of puts vs. calls has been approaching 1 lately, and may finish over
that number today.  This hasn’t happened since the end of March.  The VIX, while
still at levels that many would consider low, is currently trading above its
10-day moving average.  Also, short interest on the NYSE has been steadily
rising the last couple of months.

Negative

September — Seasonality tells us that September is the historically the
worst month for the stock market.  I don’t typically put a lot of stock in
seasonality, but I need at least one negative to keep me on my toes.

Conclusion

In my July 30 column I wrote “I
believe the market is going to have to spend some additional time consolidating
if it is going to be able to break the trading range to the upside and follow
through in a meaningful way.  This will allow more stocks a chance to set up
before the breakout occurs, and increases the likelihood that some quality
leadership could emerge.”  Over the
last month, the market has done exactly that.  It’s spent time consolidating,
which has allowed more high quality stocks the opportunity to set up in new
bases.  With breadth and accumulation indicators all pointing up, I am
anticipating that the trading range may soon be broken, and the breakout will
occur to the upside.  Plenty of opportunities should exist to profit from this
as an abundance of stocks will likely hit new highs and rally higher.  I would
focus my energy on finding these stocks.  As always, don’t completely ignore the
short side.  If the upside breakout doesn’t materialize, or quickly fails, then
it’s always important to have a Plan B.

Enjoy your Labor Day,

Rob Hanna


robhanna@rcn.com