September!!!! Also, Closing the Lehman Gap

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).


September!!!! Also, Closing the Lehman Gap
August 18, 2009

From the Wall Street Journal of August 11:

“For investors, the period between Labor Day and Halloween is proving an annual fright show. And no one knows why. It was, of course, in September last year that Lehman collapsed and everything fell apart. But then it was also September-October 2002 that the last bear market plunged to its lows. The 1998 financial crisis? It began late August, and rolled on for two months. The famous crash of 1987 came in October. But most people have forgotten that the market actually started sliding downhill in late August. That’s almost exactly what happened in 1929 too. The big crash came in October, but the market peaked just after Labor Day. Prices began falling through September, and then tumbled further still. The worst month of the Depression? September, 1931, when the Dow fell about 30 percent. It was also in September, 2000, that the bear market really got going. The 9/11 crisis, of course, came in September. That was hardly caused by investors. But what is forgotten is that the stock market was already looking wobbly. In the two weeks before the terrorist attacks, the Standard & Poor’s 500-stock index fell 7 percent. The great panic of 1907? October. The great crash of 1873? September. Yikes.”

When Bianco Research excerpted this piece in their weekly news clips they added the calculations of total return for each month since 1926. For the S&P 500 index, the only month with a negative total return from 1926 through 2008 is September. OK, this is history, but has anyone explained why it happens? There are many theories but no hard facts to point to.

Meanwhile, the US stock market recovery stalled at S&P 500 index level 1000 and seemed to reverse itself with a VIX-spiked vengeance in mid-August from the 2009 ascendant move of five months. The 1000 level is about a 35% retracement of the fall from the October 2007 peak to the March 2009 low. Market technicians would like to see the market break decisively above this level in order to run bullish in a more robust way.

The 1000 level is also the bottom of the five-week waterfall when the market tumbled over 200 S&P 500 index points last year. This period is called the “Lehman gap” and is measured by about 1000 on the downside and about 1200 on the top. It represents a time when stocks fell on a worldwide, highly correlated basis following the Lehman Brothers failure.

A number of market strategists expect the US stock market to eventually try to close the Lehman gap. We are among them. Our target for this closure is next spring. Others, like Ed Yardeni, argue that it will happen quickly as earnings outcomes for the 4th quarter of this year are discounted this coming October. Others point to the large amount of uninvested cash as the source of fuel for the additional stock market rally to come. Yet others look to all the “golden crosses” in various indices as a reason for optimism.

A golden cross is when a 50-day moving average of a price breaks up through a declining 200-day moving average. Strategas Research noted that June was the 15th time since 1929 that we have seen the golden cross. Only twice out of the previous fourteen times did this indicator fail to reach a new high twelve months after its occurrence. The failing years were 1941 (down 13.8%) and 1857 (down 6.1%).

Even counting the two down periods, a year after a golden cross found the market up 18.8% on average. That rise would take the S&P 500 Index to the top of the Lehman gap. The largest post-golden cross upward twelve months followed Sept, 19, 1932; the market rose 50.8% in the subsequent year. The most recent golden cross was on June 28, 1988; it was followed by a 19.6% twelve-month rise.

Golden crosses get a lot of respect among the technician crowd for good reason.

We are not technicians at Cumberland; however, we do look at their work. We do that because it is important to see what others are using to guide their decisions. And we do find some value in the technical work of research firms like Ned Davis or Strategas.

We find that technical work cannot predict the future. Technical methods do help keep you in a trend longer than you would otherwise do. This is important, since stocks are mean reverting but rarely stop or stay at the mean. They tend to overshoot in both directions.

We raised a little cash in US stock account is mid-August. So far that has served our clients well. We have buy targets for a number of ETFs. They are sitting on the trading desk awaiting an entry point. But for now, we will give September a little more respect than we give Rodney Dangerfield.

We wish to add this postscript. With all the Healthcare debate cacophony, has anyone noticed that there is a fully functioning federal healthcare system with a nationwide electronic records system and millions of users? It competes in the present environment. It maybe analyzed for systems use and it may be both praised and criticized for its good and bad points. It is funded by the federal government. I haven’t heard a single Congressman use it either as a positive argument or a negative one. I wonder it holds the key to a compromise and that it has in place a national infrastructure so that a new wheel doesn’t have to be discovered. It is called the Veterans’ Administration; the hospitals and clinics are ubiquitous in the United States.

David R. Kotok, Chairman and Chief Investment Officer, email:

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