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Mark Hulbert
Oct. 1, 2010, 12:04 a.m. EDT · Recommend (1) · Post:
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Best September in more than 70 years
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By Mark Hulbert, MarketWatch
CHAPEL HILL, NC (MarketWatch) "â? With the best September since 1939 now officially entered into the record books, excited investors have heightened hopes for what October has in store for the stock market.
Before they get too excited, however, they should consider how the market fared following the last time we had as strong a September.
That came in September 1939, when the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,788, -47.23, -0.44%) turned in a stunning 13.5% return for the month. Over the two and a half years following that glorious September 71 years ago, however, the Dow lost nearly 40%.
Yes, yes, I know "â? that two-and-a-half-year period was an extraordinary one. September 1939 was when Germany invaded Poland, for example.
Still, this walk down memory lane should serve as a good reality check on our natural temptation to conclude that, just because September 2010 was such a good one for equities, there's an increased chance that the stock market will do well in coming weeks too.
To be sure, the bear market that commenced following September 1939 constitutes just one data point. But a more rigorous statistical analysis reaches the same conclusion.
Let's begin such an analysis following World War II, so as not to let that bear market affect the results. Of the 64 Septembers that there have been since WWII, 24 have seen the stock market rise. In 13 of the Octobers following those winning Septembers, the Dow also rose.
That works out to a 54.2% success rate for a rising September forecasting a rising October.
Now let's focus on the 40 Septembers since WWII in which the Dow fell. The stock market rose in 25 of the Octobers that followed those losing Septembers. The resultant success rate: 62.5%.
Let me hasten to add that the difference between these two success rates is not significant at the 95% confidence level that statisticians often use to determine if a pattern is genuine. Nevertheless, notice that, if you were tempted to extract a conclusion from the data, you'd have to conclude that the odds of the stock market rising in October are actually below average because September produced a gain in the stock market.
Stubborn bulls no doubt will continue looking for other ways of slicing and dicing the data, but I suggest taking a jaundiced view of such data-mining exercises.
Consider, for example, the data provided by Standard & Poor's yesterday when it published a research note concluding that, because of September's strength, October had above-average chances of being a good one for the stock market: Before this year, the research note read, "there have been six times since 1928 that the S&P 500 gained 5% or more in September. The average price change for the "?500' one month later was a rise of 0.7%, which was more than the average advance during all months since 1928."? ( Read full story.)
But there is no statistical validity to a conclusion based on a sample with just six data points, especially given the wide variation in individual years' results. (I am not saying anything that Standard & Poor's doesn't already know, of course.)
The bottom line? Each month's stock market direction is largely independent of how the market behaved in the previous month. Though some of you may find that frustrating, it in fact is something to celebrate.
That at least is the argument made by Lawrence Tint, chairman of Quantal International, a firm that conducts risk modeling for institutional investors. In an interview, he said that the market would be "subject to unnecessary and unhealthy turmoil"? if the market's return in one period were correlated with its return in the previous period.
"We can be comforted by the fact that reasonably efficient markets always base their level on anticipated future returns, and do not include history in the calculation,"? he added.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.
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6:18 p.m. Sept. 30, 2010 | Comments: 11
- PaulRevere | 12:09 a.m. Today12:09 a.m. Oct. 1, 2010
"Mark Hulbert: September doesn't help stocks' October odds http://on.mktw.net/bUAJFU" 11:52 p.m. EDT, Sept. 30, 2010 from MktwHulbert
"Mark Hulbert: Best September in more than 70 years http://on.mktw.net/aBhMIH" 11:20 p.m. EDT, Sept. 28, 2010 from MktwHulbert
"Mark Hulbert: Contrarian analysis is bullish on stocks http://on.mktw.net/9qeKPI" 11:22 p.m. EDT, Sept. 27, 2010 from MktwHulbert
"Mark Hulbert: End-of-recession announcement not "?kiss of death' http://on.mktw.net/9G0a2U" 11:36 p.m. EDT, Sept. 23, 2010 from MktwHulbert
"Mark Hulbert: Greek sovereign debt crisis, ten months later http://on.mktw.net/9jbtLk" 11:03 p.m. EDT, Sept. 21, 2010 from MktwHulbert
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