Weekly Update

Seasonally Weak September Challenges the Bulls

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Published September 24, 2021


Monday’s gap down to begin the week was notable for the current stock market rally. It was the first time in almost a year that the S&P 500 broke the intermediate term trendline (in blue on the chart below). It has been an exceptionally long period of calm. As we go to press this week, the index remains below the trendline as the circled area below shows.

S&P 500 gap down

That this weakness is occurring in the second half of September is not at all surprising. Tom Bowley’s analysis describes well the extraordinary seasonality of September in the stock market. Here’s what Tom has discovered:

“The first thing to understand about September is that it’s the only calendar month that has lost more than it has won. September has finished the month higher 32 times and lower 38 times over the past 70 years. Those odds alone suggest we have a higher probability of moving lower, right? Even during the current secular bull market, which I believe started on April 10, 2013, September has proved challenging. Since 2013, September has ended higher 4 times and lower 4 times, though the average return has been only a modestly lower -0.15%. The only calendar month that’s been worse than September during the current secular bull market is the month of March.

But not every day or week in September has performed equally. In fact, since 1950, here’s the annualized return in September, broken down by the first and second halves:

  • September 1-16: +9.98%
  • September 17-30: -22.49%

If we look at the current secular bull market (2013-2020), the annualized returns for these same two periods shows the same pattern:

  • September 1-16: +12.54%
  • September 17-30: -15.34%

Within the “second half” of September, the truly bearish period runs from September 20th through September 26th. That marks the ONLY 7 consecutive-day period throughout the year where annualized returns are negative EVERY day, on average. The annualized returns shown below for these 7 calendar days paints a picture of extraordinary seasonal weakness.”

  • Since 1950: -38.89%
  • Since 2013: -36.46%

This year, September’s seasonal weakness has delivered the markets to key support levels in a couple of notable areas. The industrials ETF (symbol XLI below), which has the highest correlation to the broad stock market, is trading at its lowest point since March.

The industrials ETF is trading at its lowest point since March

Small-cap stocks are often viewed as a measure of risk appetite in the market as well as economic optimism among investors. The group has been trading sideways almost all year, and once again finds itself on support.

Small Caps stocks still trading sideways

The stock market’s period of calm hit turbulence early this week with some indexes and key ETFs showing notable weakness. Investors have been rewarded buying these brief market pullbacks consistently this past year. Is the seasonal weakness of late-September going to break that trend? Or will the bulls once more bring a quick halt to the pullback?

Market Update

Markets tumbled Monday in the worst day for stocks in almost five months. Calls for a market pullback have been increasing in recent weeks as the seasonally-weak month of September collided with seemingly high market valuations and a Federal Reserve on the verge of pulling back monetary stimulus efforts. But the catalyst for the Monday selloff nominally came from China. A huge property developer named Evergrande warned they might miss an interest payment on their debt. Overleveraged developers in China have been a concern for years. But the risk of a bursting bubble never materialized. Until Monday when it appeared that the bubble may be seeing its first (of many?) casualties. Given the ripeness for a market drawdown, stock investors pushed the sell button from the outset Monday sending indexes down -3% at their worst levels of the day. Stocks rebounded in the final hour to pare the loss to -1.7%. In a stroke of good timing, investors quickly shifted their attention to Wednesday’s Fed meeting. Markets ran in place Tuesday. Wednesday, once again, the Fed did not disappoint. The central bank’s message of a coming pullback in monetary stimulus hit all the right notes, sending stocks rallying to a +1% gain on the day. Concerns about Evergrande faded by the latter part of the week as the Fed’s message combined with surging oil prices to push stocks further upward in Thursday’s session. The +1.5% gain brought stocks their biggest two-day rally in six months. Interest rates responded to the Fed’s message by rising quickly in a breakout over 1.40% for the 10-year note. Friday gave investors a bit of a breather after a volatile week. Evergrande appeared to miss making their interest payment, which should have added to market stress. Instead, investors shrugged the news off Friday as oil prices continued ramping and higher interest rates pushed up financial shares.

After crashing through its 50-day moving average for the first time in many months, the S&P 500 (SPY) quickly righted itself to close the week higher by +0.57% and reclaim the closely-watched trendline. The Nasdaq 100 (QQQ) was flat at a negligible -0.02% weekly move. Smallcap stocks (IWM), loaded with the week’s hotshot financial and energy stocks, recovered from Monday’s steep fall to post a +0.56% weekly lift.

Warm wishes and until next week.