Monday, August 22, 2011 4:38 PM – Rally Fizzles, August-October is Historically Dangerous

It was a disappointing day for stocks, starting up strongly and then selling it off all day until stocks finished pretty much where they started. Europe was up 2%+ when US markets opened and then sold off most of their rally, following the US lead. Germany finished in the red.

High yield bonds continue to be sold and even high quality corporate bonds are trading down somewhat in price. Treasuries, even at their ridiculously low rates, mortgage products and some foreign bonds, primarily in emerging markets seem to be the only fixed income investments going up over the last week.

Gold just keeps going higher, up another 2% today. Gold is up 15% since August 8th. Gold mining companies have been on a tear over the last two weeks, up almost 15% as well.

Don’t look for any substantially bullish remarks from Ben Bernanke this week at Jackson Hole, WY. You might remember that he hinted at starting QE2 last year at this conference, which sent the markets sharply higher for a few months. Then, this spring, economic reality began to set in, QE2 ended and the market gave back the overwhelming majority of the gains.

August through mid-October has traditionally not been the best time for stocks. It was in August 1987 that the stock market started to unravel, leading to the ’87 crash in late October, which ended up being a fabulous time to buy. In late July 1998 the Asian and Russian currency crisis knocked the markets down. August 2000 was the peak of the market before the bad bear market of 2000-03. August-September 2001 also featured a sharp market drop. The recent financial crisis started to gain steam in August 2008, though stocks had been declining since May, leading to a huge selloff in October that had a brief respite and a further sharp decline into March 2009.

Stocks need to hold their current level or another selloff is likely. I plan to lighten up more on stocks if the S&P 500 breaks 1100. That’s less than 3% below the current level.