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When it comes to investing, September can often be cruel.

It has been the weakest month for U.S. stocks since 1979, with the S&P 500 falling an average of 1 per cent in the month, according to Thackray's 2010 Investor's Guide.

Over the past year 10 years, it has been worse, compounded by the market swoon in 2008. In this decade, the S&P 500 has fallen an average of 2.4 per cent in the month, while the S&P/TSX composite lost an average of 3 per cent.



There are theories for the selling pressure. One is that analysts often revise earnings estimates in September for the next year, and may start reducing them because they had been too high. In the United States, fund managers are often selling winning stocks and weeding out losers in time for their October fiscal year-end reports.

With the jury out on how markets will perform this month, we asked three market watchers whether they are feeling jitters from the so-called "September Effect."



Don Vialoux runs timingthemarket.ca and is a research analyst on HAP Seasonal Rotation exchange-traded fund.

When it comes to market volatility this month, Don Vialoux is not taking chances.

Because he expects a worse September than normal, his ETF, which invests in sectors during periods of season strength, is now 80-per-cent parked in cash instead of 50 per cent.

"This year, we are actually being more conservative," said the technical analyst. "It's a bit different because this is a U.S. mid-term election year. … The political rhetoric creates economic uncertainty, which creates uncertainty in equity markets."

He is also concerned about a weakening economy. "We are seeing signs of the economies in North America slowing their growth so what has happened is that analysts' estimates are starting to come down prior to the release of their third-quarter results. Then, you'll see an impact on the markets."

It's not all gloom. He likes the gold and agriculture sectors, which tend to do well in September, and expects to be fully invested from the end of October to early May when markets tend to rally.

HAP Seasonal Rotation ETF now owns Market Vectors Gold Miners ETF; Market Vectors Junior Gold Miners ETF and Market Vectors Agribusiness ETF.

Ron Meisels is president of Phases & Cycles Inc. and a researcher for the Caldwell Meisels Canada Fund.



Ron Meisels doesn't expect this September will be as bad as many people anticipate.

"September is the worst month of the year, but there are exceptions," the technical analyst said. "It depends on how strong the previous summer rally was."

While there is often a summer rally that ends in September, "this year we had the exact opposite" with markets only turning higher in late August, he said.

To have a major correction, there has to be a "major up-leg preceding it," he said. "We had a totally different summer than what we normally have.

"Therefore, it is quite possible to think we would have a different September. … Even if we might have some kind of correction, it should be fairly mild."

He expects strong performance from selective stocks this month, but "not the whole market."

Stocks he has recommended for the Caldwell fund include miner Teck Resources Ltd.; Agrium Inc., a fertilizer play, and Finning International Inc., a Caterpillar equipment dealer. They have staged breakouts from their resistance levels, he said.



Steve Palmer is hedge fund manager with AlphaNorth Asset Management and runs the AlphaNorth Partners Fund.

For Steve Palmer, September is just another month.

"I am not going to sell every stock in the portfolio just because September is sometimes a bad month," he said.

"There are many other factors that impact stock prices," said Mr. Palmer, who focuses on Canadian smaller-cap stocks and has been fully invested since July. "After the weakness that we have seen over the summer, it's time to buy. … There is no one left to sell."

Investor sentiment is very bearish and many retail investors are sitting on a lot of cash, he said. "If everyone is saying one thing, the market will quite often do the opposite."

He is more concerned about positioning for seasonal strength in Canadian small caps from December to May because tax-loss selling is over then, and RRSP money is coming into the stock market.

"I am usually cautious during the summer, but at the moment I am quite bullish over the next two to three quarters," he said. "I think this month will look positive."

His favourite stocks include junior energy firm Primary Petroleum Inc., which has a large land position in Montana - a low-profile part of the Bakken shale play.

And he has also been accumulating shares in companies such as Ucore Rare Metals Inc. and Stans Energy Inc. which mine rare earth elements used in the green technology industry and electronics. With China tightening the exports of these metals, the Western world is going to need to source another supply, he said.

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