ETFs across the board scored notable gains in the third
defied the historical precedent for September being the worst
month of the year. But if history holds true in October,
best buckle their seatbelts.
"October has a frightful history of market crashes and only
ranks midpack in post-election years," the Stock Trader's Almanac
wrote in a client note Sept. 26. "Should a meaningful decline
materialize in October it could prove to be an excellent buying
October is historically the last month of the Dow and S&P
500's worst six months of the year and the last month of the
Nasdaq's weakest four months, according to the almanac. The
research firm sees the market getting stuck in a range because of
the unpredictability of the Federal Reserve's next move, who will
take over for Chairman Ben Bernanke and the outcome of the U.S.
debt ceiling debate.
SPDR S&P 500 (
) rose almost 3% in September, pushing its Q3 gain to almost
Michael Hartnett, chief investment strategist at Bank of
America Merrill Lynch, supports the "buy the dip" strategy, based
on evidence of strong economic growth underway. His year-end
target for the S&P 500 is 1750, up about 4% from its
September close, and which translates to $175 a share for
"Real estate prices (up across the world bar Europe), purchase
mortgage applications (at an eight-week high) and credit
availability (lending to small business is up for the first time
since 2008) all argue that gross domestic product estimates are
more likely to rise than fall, in our view," Hartnett and his
colleagues wrote in a report Sept. 26.
Rising U.S. home prices lift consumer confidence and dissipate
the threat of recession, they reason.
But Mark Arbeter, S&P Capital IQ's chief technical
strategist, is "raising the yellow flag," based on technical
analysis and momentum indicators. "We also now see the potential
for a bearish head-and-shoulders pattern with the left shoulder
and the head already formed," he wrote in his weekly technical
report issued Sept. 27. His downside target for this formation
would be a 12% correction from the S&P 500's new high near
Falling stock prices are seen benefiting gold and
Treasuries.SPDR Gold Trust (
), the largest ETF tracking the yellow metal, fell about 4% in
September, trimming its Q3 gain to about 8%. Gold has formed a
bullish inverted head-and-shoulders pattern, while market
sentiment remains bearish. A break above $1,434 an ounce in spot
gold or 143.40 in GLD would confirm this outlook.
IShares Barclays 20+ Year Treasury Bond (
), tracking long-term bonds, edged up 0.4% in September, cutting
its Q3 loss to about 4%. The yield on 10-year notes soared from
1.66% on May 2 to 2.98% on Sept. 9 on expectations the Fed will
scale back its economic stimulus. The yield eased to 2.64 by
Arbeter notes that Commitments of Traders reports appear
bullish for bonds. Commercial traders and large speculators --
the so-called smart money -- are heavily bullish on bonds, while
small speculators -- the so-called dumb money who are usually
wrong -- are very bearish.
IShares MSCI EAFE Index (
), tracking developed foreign markets, outpaced both the U.S. and
emerging markets, returning about 11% in Q4 after climbing about
8%.IShares MSCI Emerging Markets Index (
) returned about 6% in Q3 after rallying 7% in September.
Market Vectors Indonesia Index ETF (IDX) soared nearly 9% the
day the Federal Reserve shocked the market by standing pat on its
stimulus program. But it has since given back all of its gains
Indonesia -- which plunged about 21% in Q3 -- suffers from a
flurry of what Credit Suisse analysts call "negative synergies"
that make it especially vulnerable to eventual tapering. It has
the largest trade deficit among emerging markets and heavy
foreign ownership of its bonds, leaving it vulnerable to a sharp
Soaring inflation coupled with a rapidly depreciating currency
erodes real earnings growth and threatens consumer spending.
Rising oil prices increase government spending on subsidies,
while falling commodity prices, especially coal, dampen export
"The economy outpaced its sustainable growth rate for three to
four years on the back of the post-global-financial-crisis
commodity boom and easy monetary conditions, and is now destined
for two to three years of subtrend growth," Credit Suisse
analysts wrote in a report released Sept. 25. "A period of weaker
activity will help correct the imbalances, including the current
account deficit that built up during the earlier period of
EEM's holdings trade at an attractive valuation of 10 times
forward earnings vs. 13.5 for EFA and 15 for SPY, which may
entice value investors. But it may be a value trap in light of
slowing economic growth and rising inflation.
The purchasing managers index for emerging markets is at an
11-year low and below those of developed countries, Credit Suisse
reported Sept. 27. Its strategists believe emerging market
currencies could weaken further because of high debt levels and
shrinking trade surpluses. Companies are returning production to
their home countries because of rapid wage growth in developing
countries. Inflation, which Credit Suisse sees rising to 5% next
year, lowers real incomes and earnings growth.