September and October have historically been the worst months for the stock market. As we enter these two months, many investors worry that history might repeat itself. Any drop in the market might create new buying opportunities for an end of the year rally. With the early rally in September will history repeat?
The corrections of September and October can be steep and sudden. Yet they often are just that, corrections where Mr. Market cleans out the prior excesses and drives many investors to the sideline just before a new rally gets underway. To be sure, this does not happen every year, but it does take place enough times to create a tradable pattern. In the past, investors who recognize this phenomenon bought shares of strong companies that outperform the market on the rebound.
If it takes place, a September pull back ends in the early part of October when a new rally gets underway. So far, the market is defying the pattern, though as we know the market likes to make fools of the most people every chance it gets.
For the sake of history if the market turns down soon, we still can see a weak September. Almost everyone remembers the dot-com bubble. It began after a frightening selloff in September and October. The investors who were aware of this pattern and had the gumption to came out winners.
During the late 1990’s and then again in 2001 the market hit bottom in October before rallying again. In each case, the drop in the market created nice buying opportunities for those willing to step in.
But they did not buy just any stock. Rather they spotted strong prospects with solid fundamental underpinnings. When accompanied by a bullish technical pattern, they had confidence to step in when the plunge ended and a new rally showed its head. In some cases, the rally lasted for more than a year.
Should the same pattern repeat in 2010, where are there some good prospects? Look for stocks with a solid fundamental base accompanied by positive technical characteristics, consolidating in a longer-term rising trend.
