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Beware the Ides of September?

While the average September has been a loser, I urge you to take seasonality studies with a grain of salt. They’re not worthless by any means, but they’re more of a small positive or small negative factor. Certainly, it pays to be a bit more cautious than normal in September, but only if that caution is confirmed by other factors.

More than a decade ago, before the Internet was accessible to everyone, a few of my closest friends decided to start a fantasy football league--that is, a league where you draft your own players, field a team each week, and face-off against opponents, getting points depending on the statistics your players rack up.

Back then, such a league was unique, but today, fantasy football is big business, with more than 15 million participants and leagues across the country, most of it online. Even the NFL broadcasts up-to-date statistics each week. My friends and I conducted our 2008 draft last week, marking the 14th season of LakeSide Football (so-named because we used to draft every year at my buddy’s uncle’s house on Lake Winnipesaukee.)

Control and Competition

Why has a “fake” sport become so popular? I think there are two reasons. First, because it allows each owner to have control, to be in charge, and to not have to get approval for his or her decisions--heck, I actually traded all-world running back Adrian Peterson of Minnesota just before my draft, to the jeers of the rest of the league. (I got Drew Brees as well as moving up in the draft.) But it’s what I wanted to do, so I did it.

Second, the competition, while friendly, is attractive. Let’s face it--in most people’s day-to-day lives, there’s not a lot of competition. That’s not to say the work isn’t challenging or interesting, but most professions don’t have a scoreboard that tells you how well or poorly you’re doing. So fantasy football can provide something of an outlet in that regard.

Because of this, most owners spend hours every week fine-tuning their various fantasy football teams. They might read blurbs about their players for a few minutes every day, and maybe watch an hour or two of NFL-related TV, updating themselves on injuries and on what teams are likely to score big points this weekend. They’ll also likely peruse the waiver wire, picking up and dropping a couple of players, always trying to create the best team possible. Of course, I never spend any time at work doing such activities (ahem).

All told, it’s a great way to not just follow football, a fantastic sport--my favorite by far--but to participate in it directly, and feel that you have a stake in each game. After a horrendous last place finish in 2007, here’s hoping Team Calzone (that’s me) can reclaim its former glory in ’08.

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What I personally find interesting about fantasy football is that the factors that attract millions of people--control and competition--are the same things that have always piqued my interest about the stock market.

Every day, week, month and year, you can compare yourself to the market as a whole. Actually, I don’t recommend comparing yourself to the market every day, or even every week; getting too close to the situation can be too stressful and it’s an accurate gauge of whether you’re doing a good job.

But there’s no doubt that measuring my performance every month or year is a good thing, and doing so gives me a competitive spark, pushing me to review my past trades, develop new rules, and re-emphasize proven rules--all in order to boost performance.

As for having control, that’s obvious, too. You are your own boss when it comes to your portfolio; you’re the one who clicks the mouse to buy or sell a given stock, and you’re the one who decides how many shares to own. (If you want to be cute and say that you use a newsletter to tell you what to do ... the fact is, you’re the one who chose that newsletter.)

Where am I going with this? Even though something like fantasy football is, well, fantasy, with little or no money on the line, and is just for fun, I seriously believe many people spend more time on things like fantasy football, than they do on their own portfolios. Believe it!

Pay Attention to Your Portfolio

I say this not as a guess. I’ve talked to dozens of subscribers just in the past couple of months who ask my opinion on financial stocks that have been taken out and shot like Citigroup or Bank of America; commodity stocks that broke down in early July, like U.S. Steel (now off 40% since late June) and Southwestern Energy (fell 40% from July 2 through July 23!); “safe” blue chips like Boeing (off 31% from mid-June through the end of July) and so on.

These investors aren’t guilty of using bad systems or being bad investors; they’re just guilty of not watching their portfolios closely. And therein is today’s lesson: Watch your portfolio! Make it a “rule” to check up with your stocks for a couple of minutes every day, or at least, a few minutes every other day. You don’t need to read every news story or listen to every company presentation--just knowing the action of the stock itself is usually enough.

On the weekends, I advise spending a bit more time, possibly an hour, just flipping through news stories online, checking out a chart, and maybe reading the weekend edition of Investor’s Business Daily.

Most important ... you should set up a spreadsheet on your computer, and each month (each month!) enter your portfolio’s total value, and the percentage gain or loss each month. This will force you to face the facts of your portfolio’s performance, for better or worse.

If you’re holding on to a bunch of old, losing stocks and your portfolio has been hammered by the bear market (and likely underperformed the preceding bull market), then the simple act of paying attention will improve your performance. So do it!

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“Beware the Ides of March!” was a warning to Julius Caesar in February of 44 B.C. Unfortunately for him, he ignored the warning, and was unmercifully killed on March 15 of that year by a group of Senators opposed to his position of dictator for life of Rome.

According to Wikipedia, Ides was simply a term used in the Roman calendar that referred to the 15th of the month in March, May, July and October, and the 13th day of the month for the other eight months; Ides simply referred to a “half month,” and Romans considered it an important day of the calendar. Today the term Ides is used as indicating impending doom.

Seasonality In Investing

For the stock market, however, it might as well be the Ides of September. Students of the market know well the poor record September brings: Since 1897, the Dow Industrials have been positive in September just 41% of the time, by far the worst reading of any month. (December is best; it’s been positive 71% of the time.) On average, the Dow has dropped 1.2% in September during those 111 years, again, by far the worst month. The trend has been fairly consistent through the decades, too.

Why such a lousy performance? No one knows for sure, but part of it is likely a dearth of pension and mutual fund contributions during the month, combined with the fact that most mutual funds operate on an October 31 fiscal year--leading to loss selling among the big investors.

Even so, while the average September has been a loser, I urge you to take seasonality studies with a grain of salt. They’re not worthless by any means, but they’re more of a small positive or small negative factor. Certainly, it pays to be a bit more cautious than normal in September, but only if that caution is confirmed by other factors.

Breaking the Trend

Remember, most of the market’s advances (and declines, for that matter), come in just a couple of months of the year--unless you’re talking about a major bull or bear market. Thus, if you predetermine that this month is going to be good, or this month is going to be bad, you might end up missing out on some great gains, which could dampen your yearly return.

This happened last year, in fact--September was a great month for us as growth stocks ramped up, and many of our recommendations soared. Missing out on that would have hurt our returns in a big way.

Back to this year, my simple market timing indicators, along with some subjective opinion on the action of leading stocks, tells me September could indeed be rough--at least at the start. I’m still expecting some type of re-test of the July lows, although if it’s going to happen, it should happen within the next couple of weeks. Today (Wednesday, September 3) was the 34th day of the rally; successful re-tests usually occur between 30 and 40 days after the initial low.

Just Flopping Around

Right now, I can’t say the market is good or bad--it’s just flopping around. Few stocks are making sustained moves in either direction, and most investors who are playing in stocks are losing money, being whipped around, and buying high and selling low.

So I’m continuing to hone my watch list. One group that’s gaining attention is the so-called “bull market stocks,” i.e., firms whose business thrives when the market rises. So I’m watching brokerage stocks like Charles Schwab (SCHW) and TD Ameritrade (AMTD), and money managers like T. Rowe Price (TROW) and Blackrock (BLK).

None of these stocks are likely to shoot the lights out, but they are relatively safe bets to prosper when a real bull market gets underway--I’ve made good money (25% to 50%) in these types of names in previous years, especially early on in new bull moves. So keep an eye on them!

All the best,

Mike Cintolo

Editors Note: As editor of Cabot Market Letter--Cabot’s flagship product, published since 1970--Mike Cintolo has helped subscribers beat the bull market of 2007, while avoiding the worst of the bear market during the past 10 months. The result has been a Model Portfolio (which focuses on young, dynamic growth stocks) that has bested the S&P 500 by an amazing 35% ... just since the start of 2007. Looking ahead, Mike believes we’re in the later innings of this bear market, and thus, he’s readying his shopping list, preparing to jump on the leaders of the next big bull move. If you want top performance in both bull and bear markets, and if you want to know the big winners of the next advance before they shoot higher, give Cabot Market Letter a try.