Say Good Bye To September - Worst Month For Stocks - And Welcome To 4th Quarter - Best Season For Stocks
Thursday, 28 Sep 2023 10:00 PM
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Absent any extra-ordinary event, the S&P500 is set to finish September down 4.6%, the Nasdaq Composite (tech-heavy) is off nearly 6%, while the Dow Jones Industrial Average is on track for a 3% decline. These are worst monthly performances since December 2022 for the S&P500 and Nasdaq, and since May 2023 for the Dow. Despite having a negative month in an overall up year so far, these declines are not unusual. September has lived up to its reputation, as usually the worst month of the year for stocks. However, as we say good-bye to a traditionally bad month, we are coming up to very favorable seasonality - the best quarter of the year. We are also entering a bullish period as forecasted by a historical cycle wave pattern.
September Lived Up To Its Bad Reputation
Stocks reached their highest level at the end of July, when the S&P500 notched a 19% year-to-date gain. About half of that gain came since the start of summer. In August, the S&P500 slipped 1.8%, and losses extended another 4.6% in September. We now sit 6.5% below this year's high, but still 11.5% above the beginning of the year.
A decline for stocks in September is usually expected, especially after a good summer. In the chart are the average monthly changes for stocks, with data compiled since 1928. September sees an average loss of 1.1%, the worst month of the year.
(Data from Yardeni Research)
We took a more granular look at the period from 1990 - 2023. Of the 34 Septembers in the period, 16 of the times saw a positive change (47%), while 18 of the times saw a negative change (53%). Of all the positive months, the median gain was 2.6%, averaging 3.2%. Of all the negative months, the median loss was -4.5%, averaging -4.6%. Overall, in this period, September sees an average change of -0.92%, almost similar to the average change since 1928.
Knocking On The Fourth Quarter - The Odds Are In Our Favor
Here's the best part: we are coming up to a very strong period of the year. We looked at the October - December period (4th Quarter) from 1990 to 2022 and saw very convincing statistics supporting a strong rally to the end of the year.
Of 33 quarters sampled, a whopping 27 times were positive (81.8%), and only 6 times were negative (18.2%). Among the positive quarters, the median gain was 7.8%, averaging 7.8% also. Among the negative quarters, the median loss was -6.0%, averaging -8.4%. Counting all 33 quarters together, the average change was 4.9%. We must acknowledge that an 82% win rate is incredible in this game.
Looking Ahead, From The Past
We always want to find as much comfort as we can when making major market calls. In this effort, we turn to the incredible Larry Williams, a market technician and historian who has been in the business for more than 60 years. Williams is a nearly mythical figure on Wall Street. He has written a dozen books, created a slew of technical indicators, many of which are named after him and being used all the time. More importantly, he correctly called the market bottom during the depth of the Covid pandemic in March 2020, as well as telling us to hold our nose and buy late last year.
In this analysis, Williams tried to smooth out historical data of the Dow Jones Industrial Average. Williams found an 8.7-year cycle wave that has appeared 15 times in the past. This chart superimposes such cycle wave (in grey) onto the Dow Jones (black candlesticks) from 2021. It is important to note that this cycle wave is not accurate in forecasting the magnitude of change, only directionality. We can see that the cycle wave made a top in early 2021, which predicted a major top for the Dow Jones at the end of 2021 - the decline in 2022. The wave made a bottom in September 2022, which also marked a very strong rally for the Dow Jones. The wave started to decline in Feb 2023, a few weeks before the collapse of some major regional banks that saw some market turmoil. We can see that the wave made a turn lower in August, which correctly forecasted the August and September declines we have just witnessed.
However, more interestingly, we see that the wave makes a bottom in mid-September and goes straight up through the end of the year. This forecasts that stock market will soon follow suit and head higher. The win rate of this cycle forecast is also incredible. Of 15 times that this pattern has appeared in the past, 12 of the times have seen a positive gain (80% of the time).
Closing Remarks
We re-iterate that we are long-term investors, not day-traders. However, we cannot turn blind eyes to statistics with incredible odds like these. These statistics lend credence to our bullish sentiment, allowing us to stay patiently opportunistic when the market experiences volatility and ugliness. We can hold our heads high and buy companies with continued strong business momentum but whose stocks have been mis-priced due to market volatility.
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