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Many Times I Wrote the Markets Historically Decline Between 5% and 20% in the Months Heading into the Midterms.

Many times I wrote the markets historically decline between 5% and 20% in the months heading into the midterms.  It is also widely known September is historically the worst month for equities.

It is also widely known that sometime in mid-October the averages enter into seasonal strength lasting until mid-April.  There is also strong precedence the averages bottom about 7-10 days before the mid-terms and the sectors that were lagging become the market leaders.

The first paragraph is or has materialized given the typical NASDAQ stock is down over 20% albeit the bifurcation is great between the indices.

Will the second paragraph come to fruition?

Earning season commences next week. Will profits again exceed expectations for the gazillionith quarter?  The S & P 500 is trading around 16.5x trailing and 15x anticipated earnings, valuations that may be “full” but are far from “stretched” or “overvalued.”

The general economic landscape is positive albeit there are several strong headwinds including uncertainty about monetary policy and an ugly geopolitical environment.  Optimism/confidence is low and cash levels high.

I think the odds are around 60% the current drubbing in the Russell 2000 will be viewed only as “noise” in four to five months because of the generally positive economic environment.

I think it is noteworthy that when the Federal Reserve begins tightening money supply, equities are higher three months later.  The markets are volatile going into and immediately following the first change, but the first tightening move is typically viewed as a sign of strength that will positively impact earnings and hinder valuations.

This week the markets are faced with a plethora of data consisting of various employment, manufacturing and housing statistics.  How will these statistics influence outlooks?

Commenting upon Friday’s market activity, equities staged a narrow based rally on dated data stating the economy expanded during the second quarter by the greatest amount since 2011.  I rhetorically ask is the “buy on dip mentality” alive and kicking?

Last night the foreign markets were down.  London was down 0.33%,  Paris down 0.64% and Frankfurt down 0.58%.  Japan was up 0.50% and Hang Sang down 1.90%.

The Dow should open considerably lower as the pro-democracy protests in Hong Kong is yet another geopolitical hot spot.  The dollar also furthered strengthened to a four year high.   The 10-year is up 8/32 to yield 2.51%.


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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.