Markets dancing in September. But why?

chart_dow_100921.top.gifClick on chart to see today's market action. By Paul R. La Monica, editor at large


NEW YORK (CNNMoney.com) -- I highly doubt that funk legends Earth Wind & Fire were referring to the markets when they wrote the song "September." But the opening line is strangely appropriate for this September.

Do you remember the 21st night of September? Love was changing the mind of pretenders while chasing the clouds away. Our hearts were ringing In the key that our souls were singing. As we danced in the night.

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What's amusing about that lyric is that September is not usually associated with dancing and cloudless days on Wall Street. It's typically a terrible month for stocks. But so far this September, the Dow is up more than 7% while the Nasdaq has surged 11%.

So is this unusual late summer rally a good sign or reason to be worried that investors are missing the boat about the health of the economy and corporate earnings? Some fear the latter.

"Some people say we've had our bad September in August. People did their selling ahead of time," quipped Karl Mills, manager of the Counterpoint Select Fund and president and chief investment officer for Jurika Mills & Keifer in Oakland, Calif. "But it wouldn't surprise me if things settled down in the next few months."

There are concerns that stocks are trading on news that isn't really "news" and that the moves are exaggerated due to the fact that some investors are sitting on the sidelines waiting for more evidence the market's move up is for real.

The recession officially ended last year. But didn't we already know that? The market even jumped after the Federal Reserve took no action Tuesday -- a move that was not surprising in the least.

And none of this news does changes the fact that people are still worried about the health of the economy going forward.

"The markets are divorced from fundamentals and they have been for a while. Many people can't even decide what the fundamentals are," said Richard Ross, global technical strategist with Auerbach Grayson, a broker dealer in New York. "That's why volume is low and people don't have that much conviction about the rally."

Ross said it's curious that stocks have headed higher lately since many of the issues that spooked investors just a few months ago -- worries about a double-dip recession, political uncertainty surrounding the mid-term elections and fears about the sovereign debt crisis in Europe -- haven't exactly disappeared.

"Has anything really changed all that much in the past four months? Not really," he said. "There's no more clarity about the housing market and employment now than there was four months ago."

But Lawrence Creatura, a portfolio manager with Federated Investors in Rochester, N.Y., said that volatile times are exactly when long-term investors should be pouncing on quality stocks. It will be too late once it's obvious the economy has improved.

"The stock market will move well in advance of any observable improvement in the economy," he said. "The average person will scratch their head and say this rally is not supported by the data. But that doesn't mean it's a bad time to invest. In fact, for that exact reason it may be a good time to look at stocks."

Creatura added that because the economic outlook remains murky, investors are better off sticking with blue chip firms that pay healthy dividends. They should, in theory, do better even if growth is sluggish.

He pointed to defense contractor Raytheon (RTN, Fortune 500) and healthcare giant Johnson & Johnson (JNJ, Fortune 500) (despite its recent problems) as prime examples of safe stocks. Creatura doesn't own either stock in any of the funds he manages for Federated.

Still, it's not a slam dunk that the economy is going to be significantly better 12 months from now. Many economists are worried that this will be a slow, painful recovery. So the market as a whole may be getting ahead of itself.

"There are glimpses of a recovery. Unfortunately, there's not much more to the story right now," said Bill Stone, chief investment strategist with PNC Wealth Management in Philadelphia.

Making matters even more confusing for the average investor is the fact that other assets which tend to do well in "unusually uncertain" times -- to borrow a phrase from Federal Reserve chairman Ben Bernanke -- are also rallying.

Investors have flocked to long-term U.S. Treasurys over the past few months, sending their yields closer to their historic late 2008 lows than to levels you'd normally associate with a recovering economy. And the ultimate bet on fear, gold, has hit several all-time highs this month.

Mills also pointed out that in some cases, investors are more interested in the corporate debt securities of blue chip companies than their stocks -- despite the fact that yields on the bonds are lower than the company's dividends.

IBM (IBM, Fortune 500) is a perfect example of this bizarre phenomenon. It sold bonds last month that yielded 1% even as its stock pays a dividend that yields 2%.

Add all that up and it's clear that nobody has any idea what's next for the economy or stocks.

"The reality is growth is going to be slow so we're going to continue to get a series of mixed signals," Mills said. "But the market will always try and confound the greatest number of people."

- The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney.com, and Abbott Laboratories, La Monica does not own positions in any individual stocks.  To top of page

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