Stocks in the “Magnificent 7” collectively lost nearly $600 billion in market value during September’s first trading session.
Nvidia (NVDA) alone fell 9.5% on Tuesday, shedding $279 billion from its market cap.
That’s quite the opening scene for the new month ahead.
But those paying attention could spot the warning signs for this market action.
I’ve been trading for over 40 years and once went on a streak of 20 winning years in a row during my hedge fund days.
And I’ve seen this downturn coming…
So today, let’s examine one important sign you should be watching… and why it’s telling you to be bearish.
Tracking Seasonality
Stock market seasonality is a key element to spotting trading trends.
Seasonality refers to the stock market’s tendency to rise or fall over certain periods of the calendar year.
For example, you may have heard the phrase “sell in May and go away.”
That refers to the S&P 500’s historical tendency to have a difficult six-month stretch from May through October.
On the flip side, the six months from November to April are often bullish when you look back historically.
That’s a big-picture way of using seasonality.
But traders can also narrow their focus to shorter-term seasonal trends.
The chart below shows how the S&P 500 has performed on average throughout the year for the past 30 years.
The vertical line shows where we are at this point of the year:
Notice that seasonal tendencies also unfold over shorter time frames. For example, we see how the market typically takes a dip in the coming days before sharply rising to end the year.
So while the S&P 500 has rallied after the early August volatility, the bulls shouldn’t grow complacent.
That’s because weak seasonality is arriving right on cue…
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Worst Month of the Year
The month of September is often the worst month of the year for the S&P 500.
And it isn’t even close.
The chart below shows the average return by month for the S&P 500 going back 30 years:
Historically, September has delivered an average return of -1.09% for the month. That’s the worst monthly average.
It also has the worst “hit rate.”
That refers to the percentage of time that the S&P 500 generates a positive return for the month.
September has finished with a negative return for four consecutive years in a row.
And here’s one final thing to note about September…
When you string together weekly returns during the year, the last two weeks of September are the worst stretch historically.
Now, averages aren’t guarantees. It’s possible September could bring us sunny times in the market.
But considering the way the month has opened, there’s good reason to keep a wary eye to the sky… and trade accordingly.
The S&P 500 has experienced a quick recovery from the volatility we saw in early August.
But I’d estimate that the stock market isn’t out of the woods until we’ve put this month in the rearview mirror.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict