Market dog days an annual tradition

by Stephen Butler

There's no reason to get bent out of shape by the recent downdraft in stock market values. It's just the summer doldrums phenomenon.

If we're at all hot and bothered by the fact that we are down about 15 percent from the high of late February, we should just go lie on the beach until the feeling goes away.

The seasonality factor of the summer doldrums has been around forever. "Sell in May, and stay away." Or, as they say further north in Canada, "Buy when it snows, sell when it goes." It certainly makes sense.

Back on May 6th, we saw what happens when there is nobody around who wants to buy stocks. That one-day experience offered one of the purest expressions of what "thin trading" means.

During the summer, when the financial services sector of the economy collectively goes on vacation, there are fewer players in the marketplace and stocks tend to creep lower.

Even during the surge in values of 2009, U.S. stocks took a breather and flattened out in August. Foreign stocks, as a group, just kept on gaining. A student of the summer doldrums might point out that many foreign companies are in the southern hemisphere where investors are in their winter buying season.

Meanwhile, what's not to like about the stock market right now?

Stocks are reasonably valued based upon current earnings. Earnings are exploding thanks to the recession's legacy of reduced operating costs, extremely low interest and now a strengthening economy. We tend to focus on the Dow Jones Average, but there is the rest of the stock market to consider.

The Russell 2000 represents small and medium-sized companies other than the S&P 500 or the Dow Jones collection. If the Dow had tracked as well as the Russell index, it would be 2,000 points higher today.

There are huge amounts of cash on the sidelines earning nothing and reflecting the fear of another bear market.

Individual investors currently carry about one-fourth of their money in money market funds, and mutual fund managers have record-high levels of cash on the sidelines. What makes this extraordinary is the fact that all this cash is earning nothing.

Moreover, it is still sitting there after what has been a year of rising market values (setting aside the current summer doldrums.)

In general, stock markets reach their peaks when nobody has any more cash left to invest. Until that point is reached, stock markets have a habit of continuing to rise. By how much? From where we are today, I'm betting on a 25 percent rise over the coming 12 months, but I'm not an analyst - just a blind optimist with still plenty of time to wait it out if I'm wrong.

"The market rises on a wall of worry," True.

To paraphrase Humphrey Bogart in "Casablanca," "We'll always have Greece "..." and maybe a big oil spill.

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