I hope all of you enjoyed a good summer with some well-deserved rest. Not much has changed.

The Russians are still in eastern Ukraine. ISIS is still running around Syria and Iraq, and the bull market is still intact.

At the time of the last newsletter, about 50% of S&P500 companies had reported their earnings, and they looked good. This trend continued and after 498 have reported, we can say that the overall earnings picture is solid.

For the 2nd quarter, according to FactSet, 74% of  S&P500 firms reported profits that exceeded Wall Street estimates. 64% had revenues that beat forecasts, as well.

The current P/E multiple for the S&P500 is 15.5. The P/E based on next year’s estimates is 13.5. These ratios suggest that the market, while not a bargain, is not dramatically over-priced.

As I have written, markets are driven by earnings and liquidity.

The FactSet numbers show that earnings are constructive. As to liquidity, it seems like there is plenty out there. While the Federal Reserve is cutting back its securities purchases, slowing the growth of liquidity in the system, the European Central Bank and the Bank of Japan are expanding liquidity.

Examining the “sentiment”, I note that while more investors are getting into or coming back to the market, there is still a great deal of negativity.  This is good.  As long as there are lots of bears, the markets will continue to climb the “Walls of Worry”.

When there are nothing but bullish headlines, then it is time to look for the exits.  I don’t think we are there yet.

Even though I believe stock prices will move higher, 2014 has been a choppy, uneven year. The S&P500 is up almost 10%.  The Dow Jones Industrials are up only 3.4%.  Smaller companies, as measured by the Russell 2000 index,  have really lagged, up less than one percent year-to-date.

With parts of the market doing better than others, there should be opportunities to sell areas that are over-extended and move to the sectors and companies that could catch up.

September: the Worst Month for Stocks

Many think of October, due to the 1987 Crash, as the worst month for stocks.  Actually, September holds that title.

Over the past 64 years, September has been an up month in only 29 of those years. September’s average return over the 64 years was a -0.64%.  During the period, there have been 39 up Octobers with an average return of +0.66%.  The poor showing in September and October might be the result of the slower summer months showing up in the 3rd quarter’s financial reports.

Also, business expenses are higher in September and October as firms gear up for the holiday season.

Consumers perhaps cut back in to save up for holiday spending.

The best news is that November and December are #3 and #1, respectively, in terms of performance. I’m not sure how seasonality should play, if at all, in the investment decision process.

However, if investors sell because it is September/October and create bargains, I’ll be buying.

— Ian Green, Pendragon Capital Management

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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.