I must admit that I was expecting the US market to be down all the way to end October, only to make back its losses from the May-June sell off from the FED’s interest rate hikes from November onwards. Which is why I have been holding back putting in more money into US equities.

Afterall, September has historically been the worst month for stocks since 1956 in percentage terms! October and August are not too close behind as the down months of the indices. (most major market crashes/depressions in history have all occured in October i.e. 1929, 1987, 1997, 1978, 1979 and 1989).

In fact, From 1945 to 2006 the returns from being invested in the S&P 500 stocks came to an annualized 7.1% November to April. For May to October, the return is just 1.5%. (without dividends re-invested). The reason is because the summer months beginning in June lead to very low trading volumes in the US and this is coupled with the fact that most mutual fund managers tend to sell their losing stocks in order to minimize takes by uses the losses to square off the gains made in the last fiscal year. Since the mutual fund fiscal year ends on Oct 31st, this wave of selling traditionally leads to the markets being solf down to a bottom and then picking up only from November onwards.

However, because of the unexpected drop in oil prices from $75+ a barrel to $63+, the markets have been rallying to a 4 month high, wiping out all the losses sustained in May-June this year.

So, are we seeing a different trend this year? Or is this the calm before a later storm that will see the market crash in October? I am indeed keeping a very close watch. There are three reasons why I fear that may be another steep correction before the S&P500 starts to climb again. The first is that the US housing bubble has burst and more and more people are unable to finance their loans. The second is the very rare occurance of stagflation (which last appeared in the 1970s) where the US economy is showing signs of slowing down amidst rising inflation. The third reason is that the recent rally has not been supported by strong volume and also the fact that leading stocks (as screened on www.investors.com) has not been surging ahead as much as the broader market.

Usually, when leading stocks do not charge forward together with the overall market, the rally is usually unsustainable. So, while I am not selling my portfolio of vakue stocks, I am also not jumping in with more money until after the scray October season is over!