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Aug. 30, 2011, 12:01 a.m. EDT
By John Nyaradi
BEND, Ore. (MarketWatch) "” The much ballyhooed Jackson Hole Federal Reserve conclave has come to a close, and now exchange-traded fund investors face a treacherous September.
This September is likely to be particularly volatile as Federal Reserve Chairman Ben Bernanke deferred any new simulative action until the now two-day Fed meeting on Sept. 20 and 21. Bernanke puts off easing talk until Sept. FOMC
Also, International Monetary Fund leader Christine Lagarde said the global economy was in a dangerous phase while Kansas City Fed President Thomas Hoenig, said last week that the Fed, "can't do it all," adding further to the uncertainty facing us as we leave the dog days of summer behind.
Beyond the gloom from the Tetons, a continuing stream of economic reports indicates that the economy continues to slow towards "stall speed." Manufacturing has dropped to contraction levels and the revision to second-quarter GDP to 1% brought the economy perilously close to negative growth.
This week will bring a slew of economic reports that could make the September Fed meeting seem far, far away, among them home sales, (just in at -1.3% for July Pending Home Sales,) housing prices, consumer confidence, factory orders and the all important non-farm payrolls report on Friday.
Seasonality also points to a rocky ride ahead as Septembers are historically the worst performing month for the stock market. Since 1928, September has recorded more down months than any other month and also holds the record for the worst monthly drop in history which came in September, 1931, when the Dow lost -30%. Septembers can be an "up" month, but the percentage of positive Septembers is the lowest of any month on the calendar.
Beyond September, of course, comes the notorious month of October which is known for major stock market crashes including Black Monday on Oct. 19, 1987, and Black Monday on Oct. 28, 1929. Based on historical performance for September and October, it's easy to conclude that the next couple of months could be a wild ride, indeed.
With troubling seasonal factors, negative economic reports and a schizophrenically volatile stock market, it's no wonder that little guys like us feel dazed and confused.
As we head into the dangerous weeks ahead, here are two options to consider:
1. Sometimes the best position is no position. As I wrote in The Guru's Corner on MarketWatch in October, 2008 , when markets enter a "cone of confusion," sometimes the best policy is just to stand aside until the fog clears. Today's market and economy would certainly qualify as such a cone of confusion. In more and more ways, today's conditions are starting to remind me of the "bad old days" and so cash could be a good place to be until the fog clears.
2. Head for safety. In spite of the recent credit downgrade of the United States, safe U.S. Treasuries are still considered a "safe haven," and iShares Barclays 7-10 Year Treasury Bond Fund /quotes/zigman/1480156/quotes/nls/ief IEF -0.66% has been on a major tear.
All in all, it looks like a precarious period ahead, and, as the old saying goes, sometimes the "best offense is a good defense." In my opinion, caution would seem to be the most prudent course to steer as we say goodbye to Jackson Hole and head into the potential shoals of September.
Disclosure: Wall Street Sector Selector ( wallstreetsectorselector.com ) actively trades a wide range of ETFs and positions may change at any time.
John Nyaradi publishes Wall Street Sector Selector (www.wallstreetselector.com), a site specializing in ETFs. He's also the author of "Super Sectors: How To Outsmart the Market Using Sector Rotation and ETFs."
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