As Sam Sees It: Sharp Recovery Rally Could Affect September Slump

Sam Stovall  |

Each week, we tap the insight of Sam Stovall, chief investment strategist for Standard & Poor's Equity Research, for his perspective on the current market.

EQ: Stocks have had a nice run since last week, and regained the 1,200 level on Monday. What do you attribute to the market's recent move up?

Stovall: The market is undergoing a reflex rally basically because we fell so far and so fast that even in a downtrend, you can experience very sharp counter moves. So even though we might still be in a longer-term downtrend, it's not unusual that we experience fairly violent counter trend rallies. What has caused investors to feel a little bit better about the market and allow this counter trend rally is that the European Central Bank agreed to step in and purchase Spanish and Italian bonds, thereby keeping a yield on longer-term bonds and not allowing them to drift above 7 percent, which was the level above which Greece, Portugal and Ireland needed to be bailed out.

Also, it's because we have seen a couple of economic reports here in the U.S. that have helped allay worries of us slipping back into another recession, combined with comments by Fed Chairman Bernanke that the Fed still has tools and the wherewithal to fight another recession. Those factors together have caused investors to believe that maybe the sell-off was overdone.

EQ: In your latest Sector Watch Report, you quoted Mark Arbeter, S&P's Chief Technical Strategist, that prices need to rise to confirm a bullish stock reversal. If that happens, how much more room do bulls have to run?

Stovall: He believes that the S&P 500 will be able to move up to the 1250 to 1270 area, which represents both a particular retracement level as well as the neckline of the head and shoulders pattern that was broken in July and caused prices to fall so precipitously to begin with. Because he believes that there is an awful lot of supply, meaning that there are a lot of investors who bought at that level and would be very happy to sell once they get back to break-even that at a minimum, we will likely see the market pull back once it's re-approaching the 1250 to 1270 level. So he would need to see a sharp move above that area that lasts for several days if not weeks, combined with heavy volume to indicate to him that this correction has run its course.

EQ: September has historically been the worst month for the stock market. What do you think investors could expect to see this month?

Stovall: Well, I always believe that if you put a personality to the market, it is a very devious individual who likes to make the greatest number of people wrong at any one point in time. Historically, September is the worst month of the year and has posted average declines whether you go back to 1970, 1945 or 1929. February is the only other month where the S&P has posted an average decline since 1945.

September is also a very volatile month--third only to January and October, which is the worst by far. So if history repeats itself, and there's no guarantee it will, then volatility will stay with us and we could experience a price decline. Yet, if the market does try to prove the greatest number of people wrong at any particular point in time, then we could see September be fairly strong, and thus delaying the typical pullback until October.

EQ: Are there any reasons why this September might be any different than from years past?

Stovall: Since the market did go through such a sharp correction, falling a total of 18 percent at its low point on August 8th, and because there's very little resistance between the low point of around 1120 and the initial decline of 1363 on the S&P 500, we could see a fairly sharp recovery rally that extends over a period of several weeks. But why specifically this September might be different from others? It's very hard to say. I believe investors are going to ascertain economic data, they're going to be listening to the central banks both in the U.S. and in Europe to get better clues as to the possibility that the U.S. will fall into another recession or the likelihood that we could just continue to see ongoing sovereign debt contagion in Europe.

EQ: In a recent edition of the IPC Notes, the committee said it expects a huge correction in gold and silver prices. Can you talk more about that?

Stovall: That correction possibility is one that was brought forth more by the technicians, indicating that because gold prices have run up so quickly--sort of a reverse-case scenario of equities prices--that they were subject to some attempted profit-taking, digestion of gains, whatever you want to call it, and we could see gold prices head back down to the $1,500 to $1,600 level. However, we believe that would make for another buying opportunity longer term, not the end of this cyclical bull market for gold.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

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