- The Washington Times - Friday, October 2, 2009

OPINION/ANALYSIS:

This week marks not only the end of the September quarter, but also the nine-month mark for both the calendar year and stock market returns.

Several weeks back, I wrote that September has statistically been a negative month for the stock market. Much like the recent market rally, which has surprised many investors as to its strength and duration, the Standard & Poor’s 500 Index posted a positive 3.6 percent move in September.

At issue once again as we enter a new month is whether the stock market is poised for a pullback.

First things first, let’s look at some of the market return data. Despite the choppiness of the past few days, which we’ll discuss in a bit, the year-to-date returns of the major market indexes - the Dow Jones Industrial Average, the S&P 500 and the Nasdaq - are all clearly in the double digits. I would point out that few likely expected the indexes to be at their current levels back in March. To further put this into perspective, the past three months have shown the biggest quarterly gain for the Dow since the fourth quarter of 1998 and its best third-quarter performance since 1939.

As we dissect the data, a few things become clearer.

First, nearly all, if not all, of the moves in the market, as measured by either the S&P 500 or the Dow, came in the September quarter.

Second, there were clearly leaders and laggards in terms of performance for different industry groups. Financial stocks posted a strong rebound, up 29 percent in the past three months, as did basic material stocks and industrials. Not all that surprising for the latter, given the bottoming of economic data and the tendency of those two groups to pick up heading into an economic recovery.

Laggards, on the other hand, were telecommunications and utilities. Perhaps the greatest outlier was technology, which bucked the trend and performed better on a year-to-date basis compared with the past three months. Much of that can be attributed to the recovery from drastic inventory reductions late in 2008 that continued into 2009.

As with many things, past a certain point, people start calling into question whether something is too good to be true or, as is the case with the market rally, is sustainable. Said another way, has enthusiasm moved measurably ahead of where we actually are?

I mention this amid the backdrop of economic data over the past several weeks that have suggested a bottom to the recession had been reached. One of the dangers is that expectations become too rosy too quickly and reality fails to live up to those expectations.

In the past two weeks we have had several data points that were weaker than forecast - the unexpected increase in jobless claims and weaker than expected data for personal income, the ADP labor report and the Chicago Purchasing Managers Index.

In addition, several other recent data points also failed to live up to expectations. These data points include consumer confidence on Sept. 29, new home sales, durable goods and existing home sales.

This rash of “missed” expectations is likely to throw cold water onto the face of economic recovery perceptions and raise anew the question of how rocky the recovery will be. At the same time, this will permeate market sentiment, and in my view make the market that much more volatile as we head into corporate reporting for the September quarter, which kicks off in earnest next week.

The recent data could be the latest false start for the economic recovery or it could prove that expectations were overly enthusiastic. Either way, a professional investor adage comes to mind: Buy the rumor, sell the news.

Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston. He can be reached at cversace@washingtontimes .com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.