Up and Down Wall Street
FRIDAY, SEPTEMBER 21, 2012
It's the Most Dreadful Time of the Year -- for Stocks
By RANDALL W. FORSYTH
More market upheavals have happened on Sept. 22 -- "Gann Day" --than any other. Can the central banks stave off another one?
"October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February." So wrote Mark Twain, ruefully, given his unfortunate experiences in investing.
But there is something about this time of year. Just when nature is at its best -- still-warm temperatures, but you can sleep with the windows open, summer crops in abundance, leaves still on the trees -- financial markets seem to be at their worst.
Sept. 22 has been dubbed "Gann Day" after W.D. Gann, the legendary financial speculator of the early 20th century, who observed that more major market swings took place on that date, which happens to be the time of autumnal equinox this year and in most years. (Of course, these observations about this time of year come from the vantage point in the Northern Hemisphere. My antipodean cousins eagerly are awaiting the coming of spring.)
Of course, financial markets will be closed this Saturday for Sept. 22, but many huge upheavals came right around that date, especially in the currency markets. As notes Paul Macrae Montgomery, the publisher of the Universal Economics newsletter out of Newport News, Va., and a long-time student of market influences outside the usual financial factors, observes, Great Britain's Depression-era suspension of the pound's link to gold and devaluation took place on Sept. 21, 1931. Sterling's ignominious withdrawal from the European Exchange Rate Mechanism came a few days early on Sept. 16, 1992.
Other currency turning points also came around Gann Day. The so-called Plaza Accord took place on Sept. 21, 1985, which effectively engineered a decline in then-high-flying dollar. The rescue of Long-Term Capital Management -- the culmination of the Asian currency crisis that began in July 1997 -- came on Sept. 23, 1998. And Montgomery notes that the peak in the price of gold resulting from the 1869 attempt by Jay Gould and Jim Fisk to corner the gold market came on Sept. 21 -- three days before the ploy collapsed when the U.S. government sold gold. And in this century, while gold bullion peaked in January 1980, gold and silver stocks made their bull-market highs on Sept. 22 later that year, he adds.
Adds Larry E. Jeddeloh, editor-in-chief of the TIS Market Intelligence Report and another Gann observer: "The next financial crisis I think is going to be in the currencies, so getting by another Gann day without an FX collapse would be cause for celebration in my book."
While the most memorable crashes took place in October -- 1929, 1978, 1979, 1987, 1989 -- markets often peaked during the prior month before starting their steep slides. Specifically, the Dow Jones Utility index peaked on Sept. 21, 1929, weeks before the Great Crash of that year. And Montgomery also notes a panic on Sept. 21, 1873, forced the temporary shuttering of the New York Stock Exchange. In addition, stocks sometime make major lows, as on Sept. 22, 2001, in the wake of the 9/11 attacks.
And of course, the financial crisis of 2008 turned into a panic with the bankruptcy of Lehman Brothers on Sept. 15, the near-collapse of AIG the following day and the rejection of the bailout by the House on Sept. 29., culminating in the waterfall declines in October.
What is it about Gann Day? Montgomery, who is willing to look into the seemingly irrational forces behind market moves, writes that some recent academic research has discovered apparent seasonal anomalies relating to stock prices and blood chemistry. He adds other studies have found "significant increases in human violence proximate to the autumnal and vernal equinoxes." Whether these hypotheses are true or not, the current violence in the Middle East, from Syria to the murder of the American ambassador to Libya to the anti-U.S. protests sweeping the region, appears consistent with them.
What could be making a high now may be complacency, as indicated by the depressed state of the CBOE Volatility Index for the Standard & Poor's 500, which is better known by its ticker, VIX. Also popularly known as the market's fear gauge, the VIX set a low for the year earlier this week under 14 before ticking up over that mark Thursday.
As my colleague, Steve Sears, reported in his Striking Price column Thursday, buyers seeking protection from the clear-and-present risks facing the market -- from the third-quarter earnings reporting season starting next month, the looming fiscal cliff on Jan. 1 and, of course, November's elections -- have stepped up their purchases of VIX calls. Those options would increase in value if the fear gauge rises, as would certainly happen if the stock market tumbles from its recent highs as a result of these or other, unknown risks.
The subdued state of volatility can in large part be traced to the actions of the major central banks, beginning with European Central Bank President Mario Draghi's July 27 declaration to do "whatever it takes" to save the euro. Then on Sept. 13, the Federal Reserve's so-called QE3, involving the purchase of $40 billion of mortgage-backed securities per month until the central bank saw substantial improvement in the labor market, plus extending the period of near-zero interest rates all the way to mid-2015. And this week, the Bank of Japan joined in expanding its QE, lest it be further disadvantaged by the strong yen while other central banks ease.
But even as the monetary authorities have reduced volatility and induced investors into risk assets, especially stocks, they have not attacked the basic problems of Europe's debt crisis or the sluggishness of the economy in the U.S. and abroad, at least not yet. Warnings from economic bellwethers FedEx(FDX) and Norfolk Southern (NSC) this week underscore the string of weaker-than-expected data, notably the steady increase in new unemployment claims, to the 380,000 range from the summer trough around 350,000.
The central banks may be able to stave off Gann Day, for now. But, with complacency seemingly topping out, be prepared for possible October Surprises ahead.
But there is something about this time of year. Just when nature is at its best -- still-warm temperatures, but you can sleep with the windows open, summer crops in abundance, leaves still on the trees -- financial markets seem to be at their worst.
Sept. 22 has been dubbed "Gann Day" after W.D. Gann, the legendary financial speculator of the early 20th century, who observed that more major market swings took place on that date, which happens to be the time of autumnal equinox this year and in most years. (Of course, these observations about this time of year come from the vantage point in the Northern Hemisphere. My antipodean cousins eagerly are awaiting the coming of spring.)
Of course, financial markets will be closed this Saturday for Sept. 22, but many huge upheavals came right around that date, especially in the currency markets. As notes Paul Macrae Montgomery, the publisher of the Universal Economics newsletter out of Newport News, Va., and a long-time student of market influences outside the usual financial factors, observes, Great Britain's Depression-era suspension of the pound's link to gold and devaluation took place on Sept. 21, 1931. Sterling's ignominious withdrawal from the European Exchange Rate Mechanism came a few days early on Sept. 16, 1992.
Other currency turning points also came around Gann Day. The so-called Plaza Accord took place on Sept. 21, 1985, which effectively engineered a decline in then-high-flying dollar. The rescue of Long-Term Capital Management -- the culmination of the Asian currency crisis that began in July 1997 -- came on Sept. 23, 1998. And Montgomery notes that the peak in the price of gold resulting from the 1869 attempt by Jay Gould and Jim Fisk to corner the gold market came on Sept. 21 -- three days before the ploy collapsed when the U.S. government sold gold. And in this century, while gold bullion peaked in January 1980, gold and silver stocks made their bull-market highs on Sept. 22 later that year, he adds.
Adds Larry E. Jeddeloh, editor-in-chief of the TIS Market Intelligence Report and another Gann observer: "The next financial crisis I think is going to be in the currencies, so getting by another Gann day without an FX collapse would be cause for celebration in my book."
While the most memorable crashes took place in October -- 1929, 1978, 1979, 1987, 1989 -- markets often peaked during the prior month before starting their steep slides. Specifically, the Dow Jones Utility index peaked on Sept. 21, 1929, weeks before the Great Crash of that year. And Montgomery also notes a panic on Sept. 21, 1873, forced the temporary shuttering of the New York Stock Exchange. In addition, stocks sometime make major lows, as on Sept. 22, 2001, in the wake of the 9/11 attacks.
And of course, the financial crisis of 2008 turned into a panic with the bankruptcy of Lehman Brothers on Sept. 15, the near-collapse of AIG the following day and the rejection of the bailout by the House on Sept. 29., culminating in the waterfall declines in October.
What is it about Gann Day? Montgomery, who is willing to look into the seemingly irrational forces behind market moves, writes that some recent academic research has discovered apparent seasonal anomalies relating to stock prices and blood chemistry. He adds other studies have found "significant increases in human violence proximate to the autumnal and vernal equinoxes." Whether these hypotheses are true or not, the current violence in the Middle East, from Syria to the murder of the American ambassador to Libya to the anti-U.S. protests sweeping the region, appears consistent with them.
What could be making a high now may be complacency, as indicated by the depressed state of the CBOE Volatility Index for the Standard & Poor's 500, which is better known by its ticker, VIX. Also popularly known as the market's fear gauge, the VIX set a low for the year earlier this week under 14 before ticking up over that mark Thursday.
As my colleague, Steve Sears, reported in his Striking Price column Thursday, buyers seeking protection from the clear-and-present risks facing the market -- from the third-quarter earnings reporting season starting next month, the looming fiscal cliff on Jan. 1 and, of course, November's elections -- have stepped up their purchases of VIX calls. Those options would increase in value if the fear gauge rises, as would certainly happen if the stock market tumbles from its recent highs as a result of these or other, unknown risks.
The subdued state of volatility can in large part be traced to the actions of the major central banks, beginning with European Central Bank President Mario Draghi's July 27 declaration to do "whatever it takes" to save the euro. Then on Sept. 13, the Federal Reserve's so-called QE3, involving the purchase of $40 billion of mortgage-backed securities per month until the central bank saw substantial improvement in the labor market, plus extending the period of near-zero interest rates all the way to mid-2015. And this week, the Bank of Japan joined in expanding its QE, lest it be further disadvantaged by the strong yen while other central banks ease.
But even as the monetary authorities have reduced volatility and induced investors into risk assets, especially stocks, they have not attacked the basic problems of Europe's debt crisis or the sluggishness of the economy in the U.S. and abroad, at least not yet. Warnings from economic bellwethers FedEx
The central banks may be able to stave off Gann Day, for now. But, with complacency seemingly topping out, be prepared for possible October Surprises ahead.
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