September swoon may again come to market

NEW YORK — After spiking above the 50 mark two weeks ago, an index of investor sentiment has dropped sharply in what analysts say is among the signals forecasting a change in the U.S. stock market.

"Signals are flashing that currencies, commodities and equities are all about to turn. There are too many signals across too many assets to ignore," said T.J. Marta, chief market strategist at research firm Marta on the Markets.

In a note, he drew attention to the American Association of Individual Investors survey's bullish surge above 50 two weeks ago and its subsequent fallback.

Monday, led by energy and consumer-discretionary shares, the major stock indexes all ended lower but still retained gains for the month.

After falling as much as 110 points early on, the Dow Jones industrial average finished at 9,496.28, off 47.92 points, or 0.5 percent, leaving the blue chips with an August rise of 3.5 percent.

The Standard & Poor's 500 index shed 8.31 points, or 0.8 percent, to 1,020.62, giving the broad market index a 3.4 percent monthly gain.

The Nasdaq composite index tumbled 19.71 points, or 1 percent, to 2,009.06, for a 1.5 percent rise from the month-ago close.

The investor survey, which measures the percentage of individual investors who are bullish, bearish and neutral on stocks over the coming six months, last week saw bullish sentiment drop to 34 percent, beneath the long-term average of 38.9 percent; neutral sentiment fall 17.5 percent, below the long-term average of 31.1 percent; and bearish sentiment rise 48.5 percent, above the long-term average of 30 percent.

Just two weeks earlier, bullish sentiment stood at 51 percent, neutral sentiment at 16 percent and bearish sentiment at 33 percent.

During the three previous times the index behaved in this fashion, the S&P 500 corrected, as it did in early 2007; peaked, as in October 2007; or saw a bear-market rally fail, as was the case in May 2008, Marta wrote.

Bears can find some solace in the fact that a strong August and ensuing strong September have not occurred since 1982, and two years — 1970 and 1982 — "appear the only periods where a 4 percent or more gain in the S&P 500 for August led to positive return in September," said Nick Kalivas, an analyst at MF Global Research, in e-mailed comments.

"On balance, the chart seems to argue for a weak September. This is one reason for the caution in the market," he added.

Two things happen in September: "The kids go back to school, and more often than not, the stock market heads down," said Ed Yardeni, chief investment strategist at Yardeni Research, in a report.

Going back to 1926, investors have, on average, lost nearly 1 percent during September — "the only month" with a negative average return, Yardeni noted.

He pointed to research, based on data for 18 developed stock markets around the world, which found that in 15 of those markets "September brought red ink for investors."

Bucking trend

But Yardeni believes enough power remains in the rally off March lows to buck the historical trend, in light of what he calls three turbochargers:

The Federal Reserve is providing liquidity by pegging the federal funds rate at zero.

The Fed and foreign central banks have been monetizing more than half of the record budget deficit of the U.S. government so far this year.

The Chinese, to keep their economy growing in the face of weak U.S. consumer demand for their exports, are likely to continue providing monetary and fiscal stimulus.