September is already the stock market's worst month historically, posting an average 1.2 percent decline. And despite a mild rally since mid-July, stocks are still trading at near bear-market levels. Year to date, the major averages are down as much as 12 percent.
"This is just the last gasp," says Kathy Boyle, president of Chapin Hill Advisors in New York. "From a technical point of view the rally actually did not look great. Pharmaceuticals aren't participating, none of the drug companies, none of the biotechs are participating, and tech is actually lagging."
"So this is really being driven by the financials," she adds. "Nothing systematically changed from last week other than they kind of got oversold. ... I'm still very worried."
Some think that while stocks could realize gains later in the year, the early part of autumn doesn't offer much optimism.
"It would not be unnatural for the market to test the bottom," says Quincy Krosby, chief investment strategist at The Hartford. "This is a bear market, and that would fit in with the process of a bear market."
Playing the Downturn
Taking advantage of such downward-trending situations is easier with the explosion of exchange-traded funds that reward investors when the market is lower.
It's a move that Boyle is employing with gusto. "The credit crisis is still here," she says.
Among the array of short ETFs, which gain 2 percent for every 1 percent the index they track falls, are ProShares funds: Ultra Short Financials, Ultra Short Russell 2000, and Ultra Short Real Estate. She also holds or is buying ETFs that are short the Dow, S&P 500 and the Nasdaq, as well as semiconductors and industrials.
Boyle has been consistent in predicting sharp stock downturns this year, and says that by October the Dow will slip below 10,000 and the S&P will tumble to 1,100 or lower, and the Nasdaq tech barometer is on its way to between 1,500 and 1,600.
Yet it's not all doom and gloom for Boyle. A rapid, steep fall could send the market to its long-awaited bottom, and the presidential election or another significant event could signal at least a steadying for the market, she says.
Stocks will slide "through October and November, then we're looking for a potential rally through the end of the year," Boyle says.
"We're looking at a 15 to 25 percent drop in the indexes over the next two months," she adds. "If that happens that could create a bottom and that may coincide with the election."