Up Now, Weaker Later

The following chart from sentimentrader.com shows September's average performance, 1950-2003. It shows a generally weaker market as we move through the month and today was the 7th trading day (with the S&P up nearly 1%). Mid-term election years are weaker than average over this stretch.

John Hussman (hussmanfunds.com) notes in this week's letter that we are in one of "the longest stretches the S&P 500 has ever gone without a 10% correction." The early summer swoon was only 7.1%. In terms of corrections, the oddest year we ever experienced was 1995: only two corrections greater than 3% the entire year. One in July lasted a day and a half with a 3.6% decline while the other reached 4 days and 3.1% in October. Compare that to the 16 corrections greater than 3% in 2000 and 14 in 1999. Even 2003, which was a great year for the market, had eight 3% corrections.

Hussman continues, "as of last week, the Market Climate for stocks remained characterized by unfavorable valuations and unfavorable market action. Stock valuations remain extremely elevated on the basis of nearly every historically reliable fundamental, including normalized earnings (price/peak, price/earnings normalizing profit margins, etc). The only fundamental that suggests stocks are reasonably valued is the price/forward operating earnings ratio. While this, of course, is the only valuation measure that's widely quoted by analysts here, the price/forward operating earnings ratio has a very limited historical record, much less any proven reliability. Even here, the assertion that the current multiple is “reasonable” is based on an apples-to-oranges comparison with the historical average of 15 for price/ trailing net earnings."