Beware the Ides of September?

09/01/2009 9:31 am EST

Focus: MARKETS

Mark Leibovit

Chief Market Strategist, VRTrader.com

Mark Leibovit, chief market strategist of VRTrader.com, says stocks look ready for a pullback, but he warns that the market often defies investors’ expectations.

This market looks tired here and very ripe for a meaningful pullback, but when? Some of my cyclical work suggests we may not see a meaningful dip until the end of September. But, there is no guarantee it will. We will see this week if sellers exert more pressure without waiting for prices to come to them.

[Friday’s] action was telling from the standpoint of good news not being able to carry the market higher. Recall how just a few short months ago, good news was a reason to kick off wild, volatile rallies where buyers rushed in and shorts were summarily torched. Part of the problem for the bulls now is that there is not a ready supply of short shares that are forced to cover and push this market higher.

One of the many clues I am watching is the recent weakness the Chinese market, in particular the Shanghai Composite Index represented by the exchange traded fund Morgan Stanley China (NYSE: CAF). The iShares FTSE/Xinhua 25 index (NYSEArca: FXI) has also been a good leading indicator.

Monday marks the end of the window dressing period and then we have a couple of days of 401(k) money coming in. But I am sure a few traders are getting scared of the calendar as September and October are notorious months for the market, with huge crashes often occurring, most recently last year when the market dropped 24% in October following September's 11% decline.

However, there are years such as 2003 and 2006 where there was virtually no pull back, so anticipating a crash is a bit premature. The trend is still higher, perhaps much higher, to my 10,300 Dow Jones Industrial Average and Standard & Poor’s 500 index 1100+ minimum upside targets.

We are holding some long positions, but I am reluctant to get more aggressive at current lofty levels. When I see garbage like Citigroup (NYSE: C), American International Group (NYSE: AIG}, Fannie Mae (NYSE: FNM), and Freddie Mac (NYSE: FRE) rallying, knowing full well they are essentially bankrupt companies, it is clear we could be coming to the end of the market's short-term move.

[Meanwhile,] the US Dollar Index traded up 0.362 to 78.371, [but it] remains awfully close to the lows, and the trend looks down. If the stock market crashes, the dollar will see increased demand. Otherwise, expect new lows sooner or later.

Though bullish sentiment is quite high, the financial press is pounding the table regarding the likelihood and “need” for a correction. Could we just be climbing a “wall of worry”? As Marty Zweig most notably stated, you can't fight the Fed, and even though they are driving the market higher with progressively [more] worthless dollars, you can go broke standing in front of it.

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