Drug Addicted Share Markets Are Not Predictable


Yesterday the Australian share market followed the lead from the US and behaved rather sedately.

The dollar remained steady around the 70 cent level.

But there’s a sense of uneasiness in the air. The proverbial calm before the storm scenario.

‘Are you expecting the market to crash in September?’ is the theme of a few emails I’ve received recently.

Truthfully, how would I know?

There are forces at play in the market that have far greater say over its direction than anything I may or may not think.

But the recent market action has forecasters dusting off the ‘beware the September crash’ predictions.

Folklore has it that September and October are the bogey months for the share market.

The 1929 crash. Black Monday in 1987. The terrorist attacks on 9/11. Lehman Brothers collapse in 2008. All occurred in September or October.

Invariably September and October feature heavily in the dire predictions about the share market.

The following chart shows that when August is a bad month for the market, there’s an 80% chance September will also be a shocker.

Source: Fortune.com

According to Investopedia:

‘Since 1950, the month of September has seen an average decline in the Dow Jones Industrial Average (DJIA) of 1.1%, while the S&P 500 has averaged a 0.7% decline during September.’

Is it something to do with the end of the northern summer? Traders not happy at being back at work?

Is it a delayed flow on from the reporting season?

Who knows?

September’s traditional poor performance is most likely the reason why old-time traders say it’s best to, ‘Sell in May and go away.’ Cashing in their chips in May and reinvesting again in November is a strategy a few people I know in the States use. They tell me the win/loss ratio is well in their favour from this six month on and six month off approach.

With all the recent volatility another trend that’s grabbing a bit of attention lately is the seven year Shemitah cycle — based off the Jewish calendar.

The end of the Shemitah cycle is in mid-September.

If we go back seven years to September 2008 we had Lehman Brothers.

A further seven years back to 2001 it was 9/11.

In 1994 there was a bond market sell off.

Then in 1987 we had Black Monday.

Can’t think of anything devastating in 1980, but gold did hit a peak in early 1980. Not sure if that counts as anything devastating — unless of course you bought gold at US$800/oz and watched it fall nearly 70% in value over the next 20 years.

Then there’s the Kondratieff wave theory — a 60-year cycle taking us through the four seasons of the business cycle — the early blooms of Spring, the sunny days of Summer, the falling leaves of Autumn and finally a very bleak Winter.

According to the latest K wave update we are in the Winter season. A frosty, dark and oh so bleak period awaits us. The K wave is also indicating tougher times in our near future.

Egon von Greyerz, from Swiss based Matterhorn Asset Management AG, recently said, ‘This coming September / October, all hell will break loose in the world economy and markets.

Egon may well be right.

But again, there are forces at play that are far greater than Egon’s assessment of what he thinks will happen.

Given that I am very negative on the outlook for the global economy, why aren’t I trumpeting an imminent collapse on Wall Street?

Calendar cycles, mathematical trends, market statistics, all have been largely produced on past patterns of behaviour.

Markets are a man-made construct. Our emotional range — from fear to rational to greed and back to fear — all influence the expansion and contraction process in prices.

These emotional patterns take years to play out — hence the long timeframes of seven years to 60 years.

Secular Bull and Bear markets are a reflection of these long emotional cycles. With price/earning multiples expanding and contracting with the prevailing social mood.

But — and this is huge ‘but’, recent (last 15 year) market behaviour is like no other period in history.

Let me give you an example. Let’s say someone close to you, a spouse, friend, sibling or child, followed a fairly predictable pattern of behaviour. Within a degree of tolerance, you could pretty much predict their reaction to certain things.

Then they start taking drugs, and their behaviour is no longer as predictable. The drug has altered their normal pattern of behaviour.

Will they be high or low? Will they now sleep erratically? Has their appetite changed? Will they drive fast or slow?

You’re not quite sure what to expect anymore.

The same principle applies to the market.

For the past 15 years — since the tech wreck — the Fed has injected increasing amounts of ‘uppers’ into the market. The Fed wants the market on a permanent high. Anytime the market looks depressed, the market is prescribed a higher dose of QE. How much higher? More than the last time.

Central banks around the world have followed the same course of treatment for ailing share markets. Every major market is addicted to some form of drug — QE, suppressed interest rates, state intervention, outright bond buying.

Using cycles of the market’s past behavioural patterns to accurately predict future outcomes is not that easy anymore. Those patterns were established before the sustained period of drug addiction.

The mental wiring is not quite the same.

I’ve no doubt that prolonged drug abuse will lead to far greater mood swings from the market. Which in turn will force the central bankers to prescribe an even higher — life threatening — dosage of uppers.

Is the market going to suffer a major downer this September or October? I do not know.

What I do know is that we have a highly unstable (overvalued) market that is extremely vulnerable to even the slightest bad news. Something as natural as global growth slowing sends it into a lather.

What happens when it’s officially reported that deflation has taken hold in major economies?

This much is predictable.

The drug addled market will react violently. Metaphorically, throwing chairs over the balcony, punching walls and doors, beds overturned and TVs smashed. The place will be trashed.

The cycles may no longer be as reliable as they once were, because of the central banker chemists and their endless supply of uppers.

However, we do know that debt crises always end badly; overvalued markets eventually become undervalued, and sustained use of mood altering drugs leads to schizophrenia, depression and even suicide.

As to when these eventualities occur, I’ll leave that to others to predict.

The important point to note is that the markets are now in a position where they can become unhinged at the slightest mention of less than rosy news. Irrespective of which month that news is delivered in.

The only way to avoid the wrath of this market is to take precautions before it enters the violent phase of its addiction.


Vern Gowdie,
Editor, The Gowdie Letter

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Vern Gowdie

Vern Gowdie

Vern Gowdie has been involved in financial planning in Australia since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top 5 financial planning firms in Australia. He is a feature contributing editor to The Daily Reckoning and is Founder and Chairman of the Gowdie Family Wealth advisory service and editor of the Gowdie Letter To follow Vern's financial world view more closely you can you can subscribe to The Daily Reckoning for free here.

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