Welcome to the Worst Month of the Year for Stocks…Maybe?

“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

Well, the dreaded month of October is upon us. Regarded by many as the most difficult month of the year for stocks, October has been the home of many stock market crashes through out history.

And we didn’t exactly get off to a good start yesterday with the stock market. On the first day of October 2009, the Dow Jones Industrial Average gave back 203 points, or two percent.

Well, I have a theory. A simple, but proven one. The stock market always gives us the opposite of what is expected.

When the Dow Jones was trading at 14,164 in October 2007, did anyone really expect the stock market to lose more than half of its value? Well, it did. Looking back, when stocks fell to their multi-year lows on March 9, 2009, didn’t it feel like the world was coming apart? Who would have thought in March 2009 that the Dow Jones Industrials would go and tack on 3,069 points within six months?

When I read these days, and I read a lot, I still see caution abounding. Everyone is worried about what will happen to the stock market this month. (October already started up on a terrible note.)

One investment newsletter I follow actually starts each issue warning about the perils of October. Robert Pretcher of the Elliot Wave Theory believes that the Dow Jones Industrial Average is headed for under 1,000. Many market commentators are calling the market rally over.

Not so fast. There is no doubt in mind that what we have experienced since March is bear marker rally. But, unlike others, I believe that the rally has more life left to it. I’ve never seen a market fall when so much pessimism abounds. And I don’t see it any different this time around.

Michael’s Personal Notes:

In the past, when the economy got tough, alcohol consumption usually stayed about the same or increased, as the theory held that people drank more booze when they were depressed. The consensus was that alcohol stocks were safe in bad times. Not this time.

Winemakers in particular have been hard hit during this recession. Farmers have seen grape prices drop about 40%, not just in North America, but around the globe, as demand for wine falls. As a 25-year lover of red wine, I’m getting deals on my favorite Italian wines I have never seen.

My many restaurant sources are telling me that people are “drinking down,” which means that, instead of ordering a $60.00 to $100.00 bottle of wine at a restaurant, they are going for the $30.00 to $50.00 bottle. And those that were ordering the $30.00 to $50.00 bottle originally are now buying wine by the glass. My play on wine has been to buy wine when it is young and store it for aging. If you like red wine, this is great time to exercise this strategy. As for the booze stocks, I’d stay away.

Where the Market Stands:

The Dow Jones Industrial Average is up 8.4% for 2009. While I am reading more and more calls that the market rally is over, more evidence is needed on my part to make the same call. Stocks never regained 50% of their losses experienced from October 2007 to March 2009. The monetary and fiscal policies continue to be very accommodative and trillions of dollars in cash is on the sidelines waiting to enter the market. Yes, I believe that the current rally is a sucker’s rally, a rally in the confines of a general bull market, but I believe the rally has more leg left.

What He Said:

“Over-built, over-speculated, over-financed and overdone. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S. housing market, which is now affecting lenders, will have significant negative effects on the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, April 3, 2007. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.