If the S&P 500 has a favorite month, September’s probably not it: the index has historically struggled this time of year. It’s what’s come to be known in the market as the “September Effect”. And, judging from a couple of technical indicators, this year’s effect is likely to be a tough one. We’re getting close to the ninth month now, so 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?
Just look at the S&P 500’s average monthly performance since January of 1928: in the month of September, it saw its steepest average decline, falling 1%. Only two other months saw declines – February and May – and their slides were tiny by comparison, at just 0.1%. The rest of the months, on average, saw gains.
S&P 500 average monthly percentage change from January 1928 through July 2022. Source: Yardeni Research
The September Effect has also shown up 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.
Still, even in the past 25 years, the S&P 500 has continued its September streak, falling on average 0.7%. In 2021, in fact, September’s losses were especially steep: the index dropped 4.7%, after seven straight months of gains.
What drives these selloffs?
If the market’s historical September weakness is clear, its causes are anything but.
Some say 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?
Arguably, the thing that’s going to have the biggest impact on stocks this September is the Federal Reserve (the Fed) and its next decision on interest rates, as it seeks to tame the country’s high inflation without crushing the whole economy. 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.
But even a Fed-inspired rally might not be enough to break the S&P out of its current bear market. To see what I mean, take a look at the 200-day moving average (yellow line): it’s a useful indicator to help identify long-term trends and potential changes in market direction.
S&P 500 five-year chart with 200-day simple moving average. Source: Bloomberg
The moving average can serve as either support (think: a floor) or resistance (a ceiling) for an asset – in this case, the S&P 500. The chart shows that the S&P 500 (white and blue lines) has risen to the moving average’s yellow line, but has failed for now to move above it. Put differently, the 200-day moving average looks like it is working as a resistance level for the S&P 500.
Trend lines are another technical tool used to analyze prices on both short- and long-term time horizons. A trend line connects at least two points on a chart and is usually then extended to see where pricing may come across resistance and support in the future. The trend line (in red) starts from the high in January 2022, connects with the lower high in March 2022, and then extends to 4,337 on August 16th. The S&P 500 got close but failed to move above this resistance level.
S&P 500 one-year chart with down trendline from January 2022 highs. Source: Bloomberg
Like the 200-day moving average, this technical indicator also points to resistance around the current level. In other words, the September Effect is likely to be alive and well this year.
So what’s the opportunity here?
September is only one month of the year, and if you’re focused on investing over a longer time horizon, the market’s monthly moves shouldn’t worry you. However, if you’re concerned about the potential for market losses over the next six weeks, there are some short-term trading moves that could help you take advantage of any slides that happen. For example, you could consider shorting the SPDR S&P 500 ETF (ticker: SPY; expense ratio: 0.09%) or the Invesco QQQ ETF (QQQ; 0.20%).
If the S&P 500 manages to move above the 200-day moving average and the downward sloping trendline highlighted in the charts above, that would suggest that the market may be ready for a run higher. Consider using those indicators as a guide to set your own entry and exit levels.
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