Stock market seasonality. You're probably familiar with the idea, even if you haven't used this term.
The concept suggests certain seasonal trends cause market patterns to consistently repeat over time.
You've likely heard the saying, 'Sell in May and go away,' suggesting the market typically provides sub-par returns from May through October.You're likely also familiar with the phrase, 'Buy when it snows and sell when it goes,' summarizing that the best market returns are typically made between November and about April. And, just in time for the holiday season, there's the 'Santa Claus rally.'
And while many people assume October -- when Halloween is celebrated -- is the scariest month of the year, that's not correct. September -- which is just around the corner -- is the historically weakest month of the year.
According to Blackhorse Analytics, during the past 64 years (1945 to 2010), the S&P 500's historical rate of return in September has been -0.7%. The only other month with a negative return over this period is February, which chalks up negative returns of -0.4%.
In contrast, December has the highest return rate of +1.7%.
There is speculation that September is a down month because institutional investors prepare for the fourth-quarter and year-end. Money is taken out of the stock market to offset taxes. In October and November, funds are reinvested, causing the market to strengthen toward the year-end.
History shows us that, in at least three instances, a weak September provides early warning of an impending October crash.
Looking back to 1929, the market peaked on September 4, 1929. By October 29, the market had fallen -11.5%. Because individual traders had borrowed on margins and banks were heavily invested in the market, this was a contributing factor to the great depression.
In 1987 a weak September preceded a brutal October. The falling U.S. dollar, concern over rising interest rates, and a weak economy led to fears of a global recession. On October 19, 1987, the market crashed. Known as 'Black Monday,' on this day the S&P 500 dropped -20.4%. More than half a trillion dollars of wealth was lost.
This one's still fresh: In September 2008 a global financial crisis was triggered by faulty sub-prime loans and credit default swaps. Giant financial services firm Lehman Brothers failed and Merrill Lynch had to be rescued. Soon after, bank failures in Europe validated fears of a global economic meltdown.To determine where the market is headed this September, we can look at two factors:
- Overbought/oversold indicators
- Economic conditions
Overbought/Oversold Indictors
When the market is overbought it means too many people have bought too quickly. An overbought market shows bullishness, but since many investors have already bought, the market can be about to reverse to the downside. In contrast, an oversold market suggests existing strong bearish sentiment. As a contrary indicator, it can be ready to reverse to the upside.
To determine if the S&P is overbought or oversold we can look at two indicators: RSI and stochastics.&RSI
RSI shows overbought conditions if it is over 70. Under 30 shows oversold conditions.
Likewise, stochastics shows overbought conditions if %K and %D are above 80; the indicator shows oversold conditions if %K and %D are below 20.
As the two-year weekly chart of the S&P shows, the index is currently neither overbought nor oversold.
However, at 46, RSI is below the key 50 juncture and falling. Stochastics, also below 50, is on the verge of giving a sell signal. If this sell signal occurs, the indicator will likely head back toward the 20 level, suggesting another weak September is ahead. If in September the market fails to hold major support at 1010, it will almost be a sure sign that a large percentage decline is ahead.
Economic Conditions
Economic conditions often provide a telltale sign of where the market is next headed.
Last week the news was predominantly negative. Reports that unemployment remains problematic confirmed recovery in the United States remains slow. Overseas markets fell in reaction. Oil prices also dropped on worries of slowing demand and lagging economic growth.
With slow economic growth, traders typically become more bearish. Heading into September the bears may again emerge from their lair.
Beware the September bear and do what you must to 'cover your assets.'
