Where did the month go?  And what happened to the typical September swoon?  To paraphrase Frank Sinatra, “it was a very good month”.

The Big Picture

Despite a final week selloff, the major market indices posted respectable gains in September.  The Dow Industrial rose 2.7%, the S&P 500 picked up 2.4% and the NASDAQ added 1.6%. For the third quarter the Dow picked up 4.3%, the S&P 500 added 5.8% and the NASDAQ posted a 6.2% gain.  For the year, the Dow is now 10% higher, the S&P 500 15% higher and the NASDAQ is better by 20% year-to-date.

Momentum is clearly on the side of the bulls but it’s not all smooth sailing.  The Euro crisis is far from being resolved.  While Spain’s banks passed the stress test designed to win over the International Monetary Fund and the European Central Bank, austerity measures have thrown Spain and Greece into civil unrest and underscore the political and social costs of such measures. 

Concerted central bank intervention has weakened the dollar.  The Banks of Japan and England as well as the European Central Bank meet this week and could do even more to defend their currencies and further weaken the greenback.  The Federal Reserve’s third attempt at quantitative easing has stoked inflation concerns, pushing gold into resistance at $1,778.  Support builds from $1,759-1,744.  

Another round of protests in the Middle East pushed the price of crude oil 10% higher in the third quarter, taxing consumers at the pump and raising the price of heating oil and its competitor, natural gas, just in time for the winter heating season. 

The housing market is showing signs of stabilizing; consumer confidence is growing despite the fact that personal income still lags spending and according to the Stock Trader’s Almanac, stocks have advanced in every fourth quarter since World War II, excluding1948, when an incumbent president wins the election.  But with more than a month to go before the elections, anything can happen. 

I, Investor 

Several headwinds can impede the anticipated rally.  First is the divergence between the Dow Industrials and Transportation index.  Dow Theory says that when the two indices diverge, a change in trend is possible.  The transportation index logged its third consecutive monthly decline in September, raising warning flags. 

The second headwind is geopolitical events over which we have no control.  We’re just one YouTube video away from more riots in the Islamic world and $100 or more for a barrel of oil.  The Euro Zone could come under renewed pressure if a single country decides to exit and triggers a complete breakdown of the single European currency. 

Here in the U.S. we have the new Supreme Court term starting Monday, the first Presidential debate on Wednesday and the all-important September Employment Situation report out on Friday.  The Federal Reserve stirs the mix with Chairman Bernanke speaking to the Economic Club of Indiana on Monday and the release of minutes from the September 2012 FOMC meeting on Thursday. 

The following week starts with banks and the bond market closed for the Columbus Day holiday, leaving equities the only market open.   Wednesday, October 10th has the Treasury budget and Beige Book releases, while international trade data, export/import prices, wholesale inflation data and consumer sentiment figures wind up the week. 

And if that’s not enough for you, get ready for the third quarter earnings parade.  So, pop some popcorn and settle in.  It’s going to be a very interesting two weeks.

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