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September's Decline And Opportunities

09/13/11 09:02:15 AM
by Billy Williams

September is marked by the return to school and Labor Day celebrations, but for fund managers back from vacation, this month signals a time to clean house.

Security:   SPX
Position:   Sell

Languishing stocks are quickly shed for higher-performing stocks and to build a war chest for more prosperous waters to fish in as the hunt for emerging leaders returns to the forefront of the minds of investors seeking higher returns for their investment capital.

As a result, this makes September a time to trim the fat as a punishing summer seasonal has pulled the rug out from under an already resistant market that has been hard-pressed to offer up any reasonable rate of return. See Figure 1.

FIGURE 1: S&P 500. The beginning of September ushered in more selling as large institutions begin to shed nonperforming holdings in the pursuit of stronger-performing opportunities. For you, this represents an opportunity to trade in strong markets as pick-up bargain basement stocks with long-term potential.
Graphic provided by:
Worse, the blockbuster trades that most speculators wait for with the tenacity of a Marine sniper is seriously redlining the upper limits of that patience as traders are hungry to see a market regain its footing and begin trending -- either bullish or bearish -- at this point.

According to "The Stock Trader's Almanac," as portfolio managers begin cleaning house, you can also begin to observe the market firming up as they get ready to make another run. This is because there is a return of enthusiasm among consumers as the holiday season begins and for those retailers who have been treading water all year, their Super-Bowl is the holiday season and they are hungry to play.

While the market is still wobbly after the fears of European debt, American businesses have been trying to conduct business as usual under some trying circumstances.

While the markets are likely to continue to decline this September, you can expect gold and silver to continue to make steady gains as the "fear trade," where money runs to in order to escape the fears of inflation and rising volatility in equities.

In addition, for those who have long-term optimistic views on equities, September offers a large selection of devalued companies that would make any value investor feel as if Christmas had indeed come early.

A good method for those value investors seeking outsized returns is to be mindful of any larger company spinning off any smaller segment of its business. These spinoffs are usually sold off by investors who are wary of them as an investment while preferring the shares of the parent company, but this could prove unwise. Spinoffs have historically gained an average of 10 points more on top of the average return of the stock as noted by Joel Greenblatt, hedge fund manager and author of "You Too Can Be A Stock Market Genius."

The title of the book reflects his sense of humor, but his method for finding strong value stocks in companies that have been spun off by their larger parent company has resulted in massive returns on investment capital and provides a strong lesson in seeking higher performance in areas that are readily dismissed by other speculators.

That said, consider companies that are selling their wares on special financing programs such as "18 months, no payments, no interest"; while their shares may have fallen, they are still running up strong sales so when those notes come due, they are likely to skyrocket as the revenue floods in as a result.

September is also a good month for shorting stocks with either the stock itself or put options, but consider the other side of the trade for strong selections on value that the current market offers to those who are smart enough to take advantage of it.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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