Aug 31, 2009, 12:11 p.m. EST
U.S. stock market set for shift as investor sentiment falls
Equities investors cautious in looking to September, historically worst month
Explore related topics
By Kate Gibson
NEW YORK (MarketWatch) -- After spiking above the 50 mark two weeks ago, an index of investor sentiment has dropped sharply in what analysts say is a key signal currently forecasting a turn in the U.S. stock market.
'On balance, the chart seems to argue for a weak September.'
Nick Kalivas, MF Global
"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 Marta on the Markets, drawing attention to the American Association of Individual Investors survey's surge above 50 two weeks and subsequent fallback.
On Monday, led by energy and materials shares, the major U.S. stock indexes all headed lower. Stocks, though, remained poised for monthly gains.
At 11:45 a.m. Eastern time, the Dow Jones Industrial Average (INDU 9,457
, -86.76, -0.91%) was down 77.09 points, or 0.8%, at 9,467.11. The S&P 500 Index (SPX 1,016
, -12.72, -1.24%) had shed 10.78 points, or 1%, to 1,018.15, while the Nasdaq Composite (COMP 2,002
, -27.01, -1.33%) was off 23.68 points, or 1.2%, at 2,005.09.
The AAII survey, which measures the percentage of individual investors who are bullish, bearish and neutral on the stock market over the coming six months, last week saw bullish sentiment falling to 34%, beneath the long-term average of 38.9%; neutral sentiment dropping to 17.5%, below the long-term average of 31.1%; and bearish sentiment climbing to 48.5%, above the long-term average of 30%.
During the three previous occasions on which 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 said.
Bears can find some solace in the fact that a strong August and ensuing strong September has not occurred since 1982, and two occassions -- 1970 and 1982 -- "appear the only periods where a 4% 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.
"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, Yardeni Research Inc.
Going back to 1926, investors have, on average, lost nearly 1% during September, "the only month" with a negative average return, said Yardeni.
He pointed to research, based on data for 18 developed stock markets around the world, that found that in 15 of those markets, "September brought red ink for investors."
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.
First, the Federal Reserve's providing liquidity by pegging the federal funds rate at zero.
Second, 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.
And third, 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.
Kate Gibson is a reporter for MarketWatch, based in New York.