Market Talk

Not only did the highly anticipated September swoon never come to fruition, the stock market surged to historic proportions.

U.S. stocks defied expectations all month to register their biggest September rally since 1939 and best quarterly performance of the year. The Dow Jones Industrial Average rose 7.7% in September, traditionally the worst month of the year for equities. All of its 30 components rose this month, with Caterpillar Inc. (CAT), Alcoa Inc. (AA) and Home Depot Inc. (HD) powering the Dow’s gains.

The Dow rose 773.3 points during the September surge, its biggest monthly point gain since October 2002 and fifth-best September ever, while also pushing the blue-chip index into the black for 2010. The index is up 3.5% this year. Of the previous 68 years when the measure was up after three quarters, it continued to rise 71% of the time and ended the year in the black 94% of those years.

September typically isn’t a kind month for equities investors. Excluding 2010, the Dow, over its entire history, has averaged a 1.2% drop in September and has fallen 58% of the time. But this marks the second year in a row and fifth out of the last six in which the index has posted positive returns.

The outsized gains have been largely attributed to a plethora of improving economic data that have coincided with a decline in chatter on potential double-dip inflation. Widespread expectations that the U.S. Federal Reserve is prepared to pull the trigger on additional stimulus measures have also propped up the stock market.

“All we needed was the economic data to stabilize and the Fed to raise their hand and say, “Not on my watch,’” regarding deteriorating economic conditions, to prompt the rally, said Barry Knapp, head of equities portfolio strategy at Barclays Capital.

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So, hmm, looks like that stellar September is getting a little clipped here today, but regardless stocks staged an impressive rebound in September. You can, and should, question its real sources and how long it will last, but right now, it is what it is.

Still, the data this morning weren’t exactly supportive, and you wonder if at some point the market will succumb to plain old reality.

Gone are the cares of life's busy throng, Beautiful dreamer, awake unto me.

If you ever needed proof that the market believes what it wants to believe (not that you don’t get it on a near-daily basis anyhow,) today would be one of those Exhibit A kind of days.

The futures are pointing to a solidly “up” opening, with Dow futures up 53. They were lower before 8:30 a.m. when a couple of data points hit the tape. Must’ve been some bang-up data to spark a rally, right?

Er, no.

Initial jobless claims slid 16,000, to 453,000. This was greeted as good news, but it’s really no news. Initial claims have been stuck at roughly this level all year. It’s good only in that it didn’t move higher, back toward the recent high of 500,000. That 453,000 level indicates no improvement in the jobs market. Additionally, another 250,000 some-odd folks fell off the edge of the proverbial cliff, i.e., they exhausted their last batch of emergency claims and are now on their own. How many of them do you think found jobs? Add some bodies to the 99er wood pile.

Then there was the GDP report. This was the third estimate of 2Q GDP, which used to be called the “final” estimate, but the BEA changed the language on that recently; there is no final reading on GDP anymore. Anyhow, the latest is that GDP rose 1.7% in the second quarter, a tick higher than the second estimate of 1.6%. That is a negligible change. There wasn’t anything in those reports worth getting excited over.

But regardless, the stock market’s in full-on, heads we win, tails we win mode.

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All anyone could talk about a month ago was the looming stock-market pullback in September. Turns out the exact opposite has come to fruition.

Analysts kept preaching how September was typically the market’s worst month of the year. But amid the gloom and doom, stocks have had the inverse reaction and raced higher this month, with the S&P 500 up about 8%, its best September performance since 1939.

But there are still six sessions remaining this month, so for all those bears still waiting for the September swoon, there’s some hope.

September’s strong performance to this point doesn’t necessarily mean it will close the month on an even higher note. Bespoke Investment Group posts the S&P 500′s 10 best September performances through Sept. 22, but notes that the index during those specific months has averaged a 1.2% decline for the remainder of September. The S&P 500 has posted positive returns for the rest of the month in only three out of the nine previous instances (not including 2010.)

Based on that data, the quick run-up this month may hit a speed bump, which is what happened today. Stocks closed slightly lower, with the Dow snapping its five-day winning streak, as the Fed’s deepening worries over deflation prompted a flight to safety. Gold hit another fresh high, while the dollar fell.

Whether this flight to safety marks the beginning of a new trend remains to be seen. But the fact that the Fed is still considering quantitative-easing measures doesn’t exactly bode well for the overall health of the economy.

That’s a big worry that shouldn’t sit well with equity investors.

US stocks burst out of the gate in September, with the DJIA posting its best one-day gain since early July after a key gauge of the manufacturing sector shows surprising strength.

DJIA surges 255 (2.5%) to 10269, its biggest one-day gain percentage-wise since July 7. S&P 500 jumps 31 (3%) to 1080, Nasdaq Comp rises 63 (3%) to 2177. NYSE volume is 4.5B shares traded, not bad volume for a session a couple days ahead of Labor Day.

Stocks rose sharply early, as traders were apparently emboldened after the S&P held the 1040 level again yesterday. But the ISM reading, coming in not just better-than-expected but actually better, was like rocket fuel. September has a reputation for being a bad month for stocks, but it also often starts off well. It did today.

Now, that lede (newspaper jargon for “lead,” the top of the story, not  be confused with lead, the material they used to use to fill the letter blocks when printing the paper,) I wrote is without a doubt a concise, accurate assessment of today’s session, if I do say so myself. However, I find it hard to believe this rally was built on anything more lasting that Friday’s rally, which had just about completely melted away by yesterday’s closing bell.

Briefly, let’s look at some of the news today. There was that Chinese PMI story. China’s official PMI rose to 51.7 from 51.2. That sparked the global stocks rally. Now, that’s a very minor move, one that still leaves the index too close to the 50 level for comfort in a diffusion index that measures not actual change but the rate of change.

Still, with the proverbial new money pouring into the market, that was enough to get things going. The market totally ignored a trio of private-sector takes on the jobs market, the ADP, TrimTabs and Challenger Grey reports. ADP said private-sector jobs fell 10,000, TrimTabs said it was down 65,000. The Challenger report was actually bullish, they said job cuts fell to a decade low. Still, those first two do not presage a good number Friday when the BLS reports the nonfarm payrolls. But no matter, because the ISM’s take on US manufacturing came in at 56.3, up from 55.5, when it was expected to slide to 52.

What makes it so surprising is that absolutely everybody expected it to fall, given that the regional Fed surveys have been uniformly depressing. So, is the ISM number a one-off or some counter-trend? I just don’t know yet, but I’m very suspicious of the ISM number. It just doesn’t fit in with anything else we’ve been seeing.

Lastly, we’ll leave you with this, a tidbit that John pointed out to me just now. As bad as August was for stocks, May was that much worse, with the DJIA losing better than 8%. What’d the Dow do on the first trading day in May? It rose, about 143 points. Over the next four sessions, it lost 771 points, a time frame that included the now-infamous Flash Crash.

Stocks are rallying after a surprisingly (very surprisingly) strong manufacturing report, which added fuel to what was already a fire. But beware, September (and most months, really,) has a tendency to start off strong – and end very weakly. We break it all down on this morning’s Markets Hub.

Maybe next month.

Sure, today’s all about Intel and JPMorgan and their strong earnings. That’s fueling investors and it certainly seems like today could be the day the Dow revisits the 10000 level. In a frenzy like this, a report like monthly retail sales just gets lost in the shuffle.

But the sales report is telling a very compelling story: sales are down sharply from even last year’s awful September, a month when the world seemed to stop revolving on its axis.

To recap, retail sales in September fell 1.5% from August. This is being given the green-shoot treatment, because it’s not as severe a slide as Wall Street expected; consensus pegged the drop at 2.1% from the previous month, which if you recall rose a surprisingly strong 2.7% from August, largely as a result of the cash-for-clunkers scheme.

Now, the Census Bureau (an arm of the Commerce Department, and the group that reports the numbers) revised August down to an increase of 2.2%. And all of these monthly numbers come with a margin of error of plus or minus 0.5%, so basically all of this could very well be a wash.

But what is not a wash are the yearly numbers, and they tell a very interesting tale. Retail sales in September were down 5.7% from September 2008 (margin of error plus or minus 0.7%.)

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