Well. Seasonality is back. Everyone in the financial media has been talking about September seasonal weakness lately. And here we are in September and the market has sold off around the 5% or so we projected last month. And it did so in the notoriously treacherous week after September quarterly options and futures expiration.
Then, as expected, traders and fund managers bought the 5% dip as they have throughout this bull market rally with the blessing of the Federal Reserve’s continuing dovish tone and accommodative policy that they reinforced at the conclusion of the 9/21-22 FOMC meeting.
We do not expect stocks to succumb to the October curse this year. That doesn’t rule out some downside disturbance, but we do not foresee an impending crash, massacre or big selloff of the sort that have given October it’s dubious reputation as the jinx month. Many of the same geopolitical, political, fundamental and technical headwinds we highlighted last month remain, as well as some others, so another 5% or so pullback is possible as Wall Street still may suffer from chronic “Octoberphobia.”
We’ve been doing this for decades and this pullback was prototypical end of Q3 window dressing and institutional selling. Several factors weighed on the markets, but most had been there all year. So why did the market sell off this month? Seasonality.
As you can see in the chart here below of the updated S&P 500 One-Year Seasonal Pattern Since 1949, over the last 72 years and the more recent 33 years, late September weakness is apparent (noted by purple arrows) along with the October turn and strong year-end rally that runs through the Best Six Months that end in April.
Last year we had a November for the record books with a rally that continued beyond yearend into late April/early May as you can see here in the green line. Then we suffered some usual May/June weakness, followed by a customary mid-year rally with the usual first half of July strength. August was unseasonably strong except for a brief correction mid-month and now September has delivered its vaunted selloff.
We’ve seen this September weakness before and expect this turnaround to continue with a strong potential for retest of the recent lows in October as is often the case with either a slightly higher or lower low – a higher low would clearly be more constructive.
So we stay our course which we believe may avoid and may potentially capitalize on seasonal September weakness and jump on the October turn with the Stock Trader’s Almanac MACD Best Six Months Seasonal Buy Signal. We believe the upcoming Best Six Month is likely to deliver like it did last year and year in and year out.
Nothing is perfect or works all the time and we’ve seen some bad Best Six Months over the years, but they have been few and far between (see page 54 of the 2021 Almanac). The Best Months with MACD timing has trounced the Worst Months with a gain of 8.9% for DJIA vs. -0.4% (updated numbers from the 2022 Almanac due out in October). Even over the past 12 years since the March 2009 bottom the Best Six Months have doubled the performance of the Worst Months.
In our opinion, there are several issues that could trigger an October slide. The Chinese Evergrande crisis seemed more like an excuse for the recent selloff and we suspect that the Chinese government will coordinate and control a solution there and curtail any fallout. There’s the debt ceiling issue. We have been here before and Congress will likely wait until the 11th hour, but it is our view that they will raise it and not put the full faith and credit of the U.S. government at risk.
It is our view the tax increase many fear is looking less and less likely to pass as the proposal is being met with resistance from many camps and President Biden’s approval ratings have slipped. Inflationary pressures are proving to be somewhat transitory. Yes, inflation will be increasing as it usually does, but in our opinion rampant inflation does not appear to be a concern.
Any increased chatter about the Fed raising rates sooner than later in 2022 is in our opinion the biggest risk to stock prices. Since the market has a history of October turnarounds, whatever it is that may trigger another bout of weakness in October, please don’t react and get flushed out of the market. Instead, be ready to act on the next Best Six/Eight Months MACD Seasonal Buy Signal that can occur any time on or after October 1.