Treasure Chest | Sep 04 2013
By Rudi Filapek-Vandyck
US equities seem to have developed a habit for abandoning August in a negative fashion. Analysts at Goldman Sachs observe the Dow Jones Industrial Average has now weakened in the final week of August in six out of the past seven years. They do not offer a plausible explanation (if there is one), but history does suggest investors may want to pay attention.
The average decline for the five day period in those six down-years is a minor -0.42%, so nothing to get really worried about so it seems, unless, so suggest the analysts, the final week of August throws up a larger than average loss. In that case, suggests history, September might turn into a negative follow-through.
The loss this year was -1.33%, larger than average thus, and reason for the analysts to preach cautiousness while the calendar moves into September.
The two previous years when losses were significantly above average (2001 and 2002) the final week of August proved the precursor to much larger losses in September. What the analysts forget to mention is that both years sat in the midst of a bear market post the Nasdaq meltdown in 2000. It wasn't until the second half of 2003 that equities finally started showing some genuine, and lasting, momentum.
We are about to find out whether it all makes a difference, or not.
Equally interesting is the second observation made by the analysts at Goldman Sachs that August has witnessed one of the larger relative outperformances for the Australian share market vis-a-vis US equities.
With the Dow down -4.45% for August as a whole, and the All Ordinaries up 1.78% for the month, this year has seen Australian equities outperform by a whopping 6.51%. This, reports Goldman Sachs, marks the largest monthly outperformance in favour of Australia since February 2009; 4.5 years ago. It was also the sixth largest outperformance over the past 13 years.
In almost all cases (except two) these relative outperformances were achieved by falling less than the US. Not this year, thus.
But what does all this mean for September and following months?
Richard Coppleson, from Insto Desk fame at Goldman Sachs in Australia, has added his own data history and calculations on top of the groundwork done. On his assessment, relative monthly outperformances tend to be followed up by significant underperformance in the following month. This looks quite ominous inside the framework mentioned earlier.
Consider, for example, the local share market underperformed in all of the three subsequent months following outperformance in February 2009.
However, investors should consider 2009 as an aberration, suggests Coppleson.On his analysis, it is more likely Australian equities will resume their relative outperformance on a 2-3 months horizon.
There are no guarantees, of course, as all of the above is purely based on history.
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