September is off to a wonderful start, with a 255-point Dow increase yesterday. But last month also started with a big (208-point) rise August 1 but then fell -4.3% for the full month, so “Day One” does not tell us where any month is going. As the financial media keep reminding us, September is the “worst month for stocks,” although this has not been true lately. September has risen in four of the last five years.

There is a reason September has been a dangerous month in past decades. In the olden days — say, before Eliot Spitzer — companies and company analysts were generally too optimistic early in the year and then slashed their over-optimistic estimates in September, before third quarter earnings announcements season. Today, however, most analysts tend to lowball earnings estimates, creating positive earnings surprises. Legally and practically, it’s far safer to under-promise and over-deliver than to over-promise your results.

The three worst Septembers came in the 1930s, but 1974 and 2001 also add to September’s scare factor:

September of 1929 is next worst, with a 9.7% decline. The 1929 fall panic set the pattern for all future fears of September and October, so let’s take a brief look at the September prelude to that 1929 crash.

The Curse of 1929 Began in Early September

On September 3, 1929, the Dow Jones index closed at 381.17, a level it would not see again for 26 years. The Dow lost 48% in 10 weeks, and 89% in less than three years. Two days after that peak, on September 5, 1929, Roger Babson — a market statistician with a reputation as a permanent bear — said, “Sooner or later, a crash is coming and it may be terrific … factories will shut down … men will be thrown out of work … the vicious circle will get in full swing and the result will be a serious business depression.”

The Babson Curse has gone down in history as one of the greatest market calls, but he had been singing the same bearish tune since 1921. All the while, the Dow was multiplying by 500%. By 1929, Babson was clearly in the minority. In The Great Bull Market, economic historian Robert Sobel wrote, “In 1929, the leading economists of Harvard, Yale, Princeton, Ohio State, Michigan — one can hardly think of a major institution missing from the list — were believers in the bull market.” For example, Yale’s Irving Fisher said in 1929 that “stock prices have reached what looks like a permanently high plateau.”

Since 1929, some other scary Septembers (most recently, 9-11 in 2001, and the financial crisis of 2008) have created fears of September, but the majority of recent Septembers have been positive. Focusing on the current September market, any mid-term election autumn is a particularly good time to buy stocks.

Mid-Term Election Rallies Often Start in “Hurricane Season”

Mid-term election lows often come during the “market hurricane season” of August through October. Some recent examples are August 12, 1982, October 11, 1990, October 8, 1998 and October 9, 2002. But no matter when the mid-term election year low comes, the rally that follows can be truly spectacular.

The Almanac Investor has tracked the details of the most reliable and predictable cycle in market history, the four-year Presidential election cycle. Unlike some other calendar correlations, the election cycle is logical and predictable. Voters tend to reject any concentration of power by either major political party. “Gridlock” is the implied Constitutional solution — a division of powers to prevent a monopoly of power.

From 1942 to 1994, the President’s political party LOST seats in EVERY mid-term election, averaging a 34-seat loss. Some of these turnarounds were dramatic: In the 1940s, the Republicans gained 53 seats in 1942, when a presumably popular four-term winner, Franklin Roosevelt, was at the war-time helm. The GOP then gained a shocking 66 seats in 1946, when Truman was President. The market loves these mid-term power shifts, delivering an average 57% gain from the mid-term low to the next election year high:

This year (so far), the mid-term election year low came on July 1, at Dow 9,596. Using that figure as the 2010 baseline, we could see a new record high over 15,000 Dow in 2012. And if we see a stunningly dramatic Congressional change (like 1994), an 82.6% gain could take us up to Dow 17,500.

September and October can be violent months. They are usually placid, but a few September/October markets have scarred our psyches, so it might pay to add downside protection before markets take off.

Double-Digit Profits No Matter What the Market Does — You are not at the mercy of the markets. You can start adding double-digit winners to your portfolio now if you’re ready to embrace the new rules of investing. Here’s how to make money every day in up markets AND down.