If you’ve ever surfed you know how right The Beach Boys were. You truly are sitting on top of the world when you catch and ride a wave on a surfboard. The Boys are on tour presently led by founding member Mike Love and member since 1965 Bruce Johnston (who joined when Brian Wilson stopped touring). They will be playing practically in my back yard next week. “America’s Band” will delight folks with their close vocal harmonies and multi-layered surf rock sound at Provident Bank Park home of the Rockland Boulders minor ball club.
However, I will be out of town. Tomorrow will be a glorious day. I will strap my 9’6” Ron Jon to the roof of the family truckster and head up to Martha’s Vineyard to spend the week with old friends, the waves and some lobsters. I had the pleasure of riding a little Jersey Shore jetty break earlier in the summer, but the vibration always changes for me in August when the humidity dips and I find myself on the beach and paddling out with much more regularity than any other time of the year.
Surfing has become a summer rite of passage for me, but it is also the time when the market waves begin to break and have come crashing to shore often enough for us to be especially leery during the two worst months of the year, August and September. Before we try to ride some overhead surf into a light offshore breeze and get lulled into a false sense of security by the lazy market days of summer, let’s step back and consider the possible headwinds ahead of us over the next few months.
Trading volume has already begun to slump and will be a drag on stock prices through Labor Day. Then the end of the third quarter volatility and portfolio restructuring will put pressure on stocks, followed by Octoberphobia. October’s position at the beginning of the 4th quarter has made it prone to deep and fast selloffs. It may have something to do with the fact that Funds wrap up transaction by the 31st to fulfill yearend redemptions and payments before they gin-up their returns for yearend.
Growth and unemployment appear to be heading toward the Fed’s stated objective. They are likely to remain low, but the taper writing is on the wall on we can expect a reduction in bond buying and the beginning of less of quantitative easing that has buoyed the market over the past 4 years. Plus, we believe the transfer of power at the Fed from Chairman Bernanke will also be a drag on stock prices. Even if it is an ideological match, it will be a new personality, which will come with some degree of uncertainty – and we all know the markets most feared nemesis is uncertainty.
While we do not expect any major downleg until 2014 when Bernanke is gone and midterm election machinations weigh on the market, a brief respite of 10-15% is expected over the next 2-3 months. The market cannot ride this bull wave forever. In fact, one of our old favorite patterns has perked up again: George Lindsay’s Three Peaks and a Domed House Top (3PDh).
In yesterday’s Blog I highlighted some recent research from Ed Carlson, combining election cycle and Lindsay patterns that projects an end to the 2009 bull market in August. I have plotted out the DJIA’s current potential 3PDh pattern, which if completed could bring DJIA back near 13000 at point 14 – about a 15% drop from the highs and roughly the same level as the 2008 and 2011 highs and the 2012 spring high.