Down Days on the 1st of the Month

One of my absolute favorite Wall Street-isms goes like this: Once is a trend; twice is a tradition; and three times is a commandment!

So, it looks like we just might have a new “tradition” in the stock market: Start each month with a big down day that scares the bajeebers out of anyone who has purchased stocks in the last two months. As Exhibit A, I offer September 1st. The S&P plunged -2.2%, while the Dow dove nearly 200 points and the Russell Small Caps got clocked for more than -2.4%.

From there, though, the markets turned around within two days and proceeded to make a mockery of all those folks counseling caution for the market’s worst month of the year. Instead of heading for the hills, traders decided to discount better days ahead in the economy – to the tune of +3.6% for the S&P in September and +5.6% for the NASDAQ. So, if you had followed the prevailing prognosis and sold in order to avoid the big bad month of September, you would have felt more than a little foolish by the time the closing bell rang on Wednesday.

As Exhibit B, notice how the same thing happened in July 2009. On July 2nd the markets dropped about 2.9% only to see rest of the month produce excellent gains.

So, in light of the fact that October has started off on an equally bad note, should we expect the bulls to work their magic once again? After all, the S&P dove -2.6% yesterday while the NASDAQ was hit for a loss of -3.1%, and the Russell was trashed by -3.4%. So, repeat after me… “Once it a trend, twice is a tradition…”

Shelving the foolishness for a moment, we should probably point out that yesterdays big dive was sponsored by a pause in the economic recovery theme. After the Chicago PMI came in below expectations on Wednesday, the bulls were hoping that the national version of the report would prove it a fluke. But instead, the ISM (they now call themselves the Institute for Supply Management) Manufacturing Index came in with a reading of 52.6. While this level does indicate that the manufacturing sector continues to expand, the reading was below August’s 52.9 and the consensus expectations for 54.

So, despite the fact that we had not one, but two reports from the housing market that came in better than expected (both Pending Home Sales and Construction Spending were above consensus) and the fact that the miss by the ISM was only the second in the last 9 months, traders focused on the dark side. And in light of the fact that we haven’t had a meaningful pullback in quite some time, the dip buyers likely went into “stand aside” mode for the day.

Speaking of dip buyers, it is a safe bet that the relative performance chase is still on, but since buyers were likely aware of the new tradition to start each month, it looks like they took the day off.

Turning to this morning, we’ve got the Big Kahuna of economic data – the September Employment report. The Labor Department reported that the economy lost 263K jobs last month, which was well below the expectations for 187K. The Unemployment Rate came in up a tenth at 9.8%, which was in-line with the consensus. Not surprisingly, stocks have moved lower in response at the open. However, by mid-day stocks have recovered.

Could we see a repeat of September's early plunge and then rebound?

Source: Top Stocks Portfolios

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