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September arrives, Wall Street's month of misery

September 1, 2009 |  5:00 am

Dreaded September is here, historically the stock market’s worst month of the year by far.

This time around the level of dread is compounded by Wall Street's six straight months of gains without a significant decline. The Standard & Poor's 500 index rallied 3.4% in August and is up 51% since hitting a 12-year low on March 9.

Though many investors remain optimistic that the economy is clawing its way out of recession, they also know that stock prices don't travel on a one-way street.

The expectation of a sharp pullback "is ubiquitous now," said Art Hogan, chief market analyst at brokerage Jefferies & Co. in Boston.

September Then again, it was for much of August, too. The market failed to cooperate.

September would seem to be the right month to get the job done. Over the last 50 years the stock market has lost ground more often in this month than in any other.

To put it another way, the Dow Jones industrial average has risen in September just 34% of the time since 1959. Most months the market has been up 50% of the time or more.

There's no single explanation for why the ninth month is so unkind to stocks. One long-standing theory is that money managers return from summer vacation inclined to clear out losing or overpriced investments and start positioning their portfolios for the kind of economy they expect in the new year.

Or could it be that they come back from vacation irritable because they have to work again?

Entering this September Wall Street already faces many of the classic warning signs of at least a near-term market peak, including high levels of bullishness in investor sentiment surveys and a surge in stock sales by corporate insiders.

Still, just how willing investors will be to let go of stocks should hinge on the economic data, and whether hopes for some kind of recovery in consumer and business spending are bolstered or quickly fade. If expectations are as far ahead of reality as the bears insist, September could easily live up to its billing as a month of market misery.

But if faith in a recovery holds, and the credit markets continue to heal, the calendar will again become a factor for stocks: Once investors get through September and October, they know that November and December typically are the market's strongest back-to-back months of the year.

-- Tom Petruno