As we near the end of August, the market is trading up over 14% for the year 2009 and over 50% off the bear market lows. Calls for a top have been widespread as economic and fundamental data just do not seem to justify this great of a rally. We looked for a top when the Shanghai Composite broke hard and fell 20%. Yet, US markets were unfazed, fading mildly in sympathy only to explode to new highs for the rally. Now we are looking for a top once again and several factors point to this occurring very soon.
With the high beta leaders of the market trading up between 50% to 160% year-to-date, traders have looked elsewhere for continued gains. Typically, in the last hurrah of a huge move higher, the most speculative plays in the market will be picked up. It is tough to buy Apple, up 100% year-to-date, so traders look to buy second-tier names. Once traders find themselves buying the third-tier names, the worst of the worst, the companies that have not participated at all in the rally, the move is usually coming to an end.
Some of the worst companies, the ratings agencies and the now government-owned companies had incredible 5-day returns into the end of the month. ABK gained 62% in 5 days with no fundamental news! The market gained 2% over the same time frame. Many of these moves occur because the stocks that the short interest felt most comfortable in finally get squeezed out into the end of the market's rally.
As we enter what has historically been the worst month for market performance, the month of September, it seems that the script is unfolding. The market may have its last hurrah into the end of August and begin its descent through September and into October.
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