September Considered the Worst Month for US Stock, So Is It Worth Shorting SPX?

5 min read
The S&P 500 doesn't have a favorite month, and September is no exception. The index has historically struggled this time of year, and this is what's come to be known as the September Effect. Click To Tweet

And judging from a couple of technical indicators, this year’s effect is likely to be a tough one. So as we get close to the ninth month, let’s take a look at what it might mean for markets and how you might prepare for a difficult month.

What is the September Effect?

The S&P 500’s average monthly performance since January 1928 has been quite impressive, with only three months seeing declines. September saw the steepest average decline, at 1%. However, this was only slightly worse than the 0.1% declines seen in February and May. The rest of the months have seen positive average returns.

The September Effect is a strange phenomenon that has been observed in major stock markets around the world and in the other major US indexes. The Dow Jones Industrial Average saw an average decline of 0.7% in the month of September between 1950 and 2020, and the Nasdaq has seen an average decline of 0.6% for the month since it began trading in 1971.

It’s certainly strange that such a weakness would recur year after year: you’d expect investors to anticipate the coming decline and position themselves to take advantage of it – for example, by selling in August ahead of expected September weakness.

Even though the last 25 years have seen some ups and downs, the S&P 500 has maintained its September winning streak. In fact, this year’s losses were especially steep, with the index dropping 4.7% after seven straight months of gains.

What drives these selloffs?

Although the data clearly makes September one of the months to see the weakness in Stocks, the exact causes are something that is way harder to pin down to a particular set of events.

Some say that the losses happen as the chief decision-makers at big investment firms return from summer vacations and dump the assets they don’t like. Those moves spark new selling pressure, the logic goes, which then sends markets lower. Some say that the desire to sell just piles up during the summer when the market volume is thin. And there’s also another factor: as people return from summer vacations with credit-card bills to pay, many look to sell some shares to pay them.

What’s likely to happen this September?

The Federal Reserve’s (the Fed) next decision on interest rates is expected to have a significant impact on stocks this September. A bigger-than-expected hike – or messaging from the Fed that bigger hikes are on the way – would likely drive stocks lower. A smaller hike – or messaging about a slowing pace of hikes – would likely send stocks rallying.

Even a Fed-inspired rally might not be enough to break the S&P out of its current bear market. The 200-day moving average is a useful indicator for identifying long-term trends and potential changes in market direction.

The moving average can provide support (think: a floor) or resistance (a ceiling) for an asset, as seen with the S&P 500 in the chart.

The S&P 500 (white and blue lines) has risen to the moving average’s yellow line, but has not yet moved above it, suggesting that the 200-day moving average is acting as a resistance level for the S&P 500.

One of the technical tools used for analyzing prices on both short- and long-term time horizons is trend lines. A trend line connects at least two points on a chart and is then extended to see where pricing may come across resistance and support in the future. The S&P 500 got close but failed to move above this resistance level.

This technical indicator points to resistance around the current level, just like the 200-day moving average. In other words, the September Effect is likely to be alive and well this year.

So what’s the opportunity here?

While long-term investors have little to worry about (as always 😊), the traders among us could be looking to short S&P500 (SPX). Exness and VT Markets offer superb conditions for the trade and will offer you a premium treatment as our referrals.

Since we are contemplating the move, another option is to join one of our managed accounts should the technical signals confirm the fundamental notion of US Equities being often somewhat blue in the beginning of the Fall season.

At the moment, the 200-day moving average points to resistance around the current level, just like the September Effect is likely to be alive and well this year. In other words, don't be surprised if the market takes a dip in the fall. Click To Tweet

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