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How to Approach September in the Stock Market (2000 vs. 2010)

by Erik Grywalski
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Note:  The following lesson is meant to help you learn from the market and does not serve as investment advice for any specific group or individual.  For more information, please read the HSR Terms of Use.

September is known for being the worst month in the stock market.

Every year when September arrives, many are quick to warn that it's a bad month for stocks and new stock investments carry extra risk.

While they may be correct at times, quite often they're inaccurate because they tend to ignore the most critical factor for determining September's outcome, the market.

After all, the market represents the collective opinion of stock investors from around the world.

Therefore, it's a good idea to find out whether or not the market is in a position to decline during the month of September.

The only way to get this important information is to look directly at the market (stock charts) so you can improve your attention to detail and get a broad perspective on price.

This is critical because your September outlook should be based on the market and not just on personal opinions or seasonal trends.

By the way, this approach never changes because it's smart to follow the market and determine its position before adopting a bearish, bullish or neutral view.

Doing the opposite can be problematic and decrease your rate of success.

For example, you can claim to be bearish on the market, but if stocks are breaking out of bases and trending higher without any signs of weakness, you're not being objective in your market analysis.

There's a good chance that your outlook is based on your own personal opinion and it might even be largely influenced by your own stake in the market (long, short or flat).

I know that this is true because it's happened to me before.Smile

One of the definitions (Dictionary.com) of objective is that an individual is "not influenced by personal feelings, interpretations, or prejudice; based on facts, unbiased."

I think that sums up "objective" perfectly when it comes to the stock market.

I'm amazed that people casually ask others for stock market advice when they don't even know if the person that they're asking is listening to the market's opinion before their own.

From my experience, stock research is not directly about individual opinion, it's primarily about the market's opinion.

Stan Weinstein, professional market analyst of 45+ years and author, mentioned that he only knew a few good market analysts.

This is likely because many favor their own personal opinion (minority view) instead of using the market's opinion (majority view) to make informed decisions.

In other words, most are not objective when it comes to the stock market.

If you would like a better chance to stay on the right side of the market, it's best to get the market's opinion first.

Nobody knows what the market will ultimately do for sure, but there are many things that you can look at to make a better decision that's based on the market's opinion.

For September, it's wise to focus solely on the market's price action to see if it sets up to decline or rallies based on its current position.

Let's compare September 2000 with September 2010 to see the key differences in what I'm talking about for the month of September.

September 2000

I'm going to focus on technology stocks for the September 2000 review.

The late '90s was all about technology and a majority of the market's strength was concentrated in that area.

The Internet build-out was gaining traction and every tech company had something to sell for the Internet.

Do you remember the term, "New Economy?"

It was popular back in the late '90s and in 2000.

Many people thought that things had changed and that the stock market would never go down because of the technological revolution (Internet).

However, outside of technology stocks, many stock sectors were already declining and entering their own private bear markets.

Because of this, the technology sector was very important to the market's health.

Typically, if techs aren't strong, it's okay because other stock sectors can lead the market higher.

In 2000, the market didn't really have this option and that's why technology stocks were vital to the market.

If the NASDAQ broke down, the stock market would be in trouble because most non-technology sectors were already in poor technical shape.

Adding to the thin market leadership, September 2000 was 18 years from the major stock market bottom of August 1982.

That's 18 years of rising stock prices (secular bull market).

Secular bull markets last from 15-20 years.

To put it lightly, the stock market advance was long in the tooth because it was almost 20 years old.

There are three (3) main groups of technology stocks to focus on for September 2000:

  1. Institutional Quality Tech Stocks off the May 2000 Bottom.
  2. Speculative Tech Stocks off the May 2000 Bottom.
  3. Tech Stocks that Broke Out of Bases after the May 2000 Bottom.

Out of these three (3) groups, the first two (2) groups or 66% were questionable (technically) and the last group was extended and prone to decline if things took a turn for the worse.

This didn't inspire a lot of confidence in technology stocks.

The technical condition of stocks was a legitimate reason to be concerned that September 2000 may actually be bad for stocks.

This was a fact from the market and in 2000, it happened to match the dire warning that's often issued for the month of September.

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