By now, everyone probably knows that September tends to be “the cruelest month.” Since 1928, history shows that September’s return is by far the worst of the year, with the month averaging a loss of -1.1%. And the odds of a decline during September are also strong since the month has seen losses 56% of the time (39 have been up, 49 down).

It is also worth noting that our cycle composite (which combines the 1-year seasonal, 4-year Presidential, and 10-year decennial cycles) continues to suggest that a corrective phase should be in effect until mid-October. So, what has Ms. Market decided to do in the face of all this? Make new all-time highs, of course!

In my opinion, the key drivers to the current seasonal divergence is (a) a universal “sigh of relief” in response to the debt ceiling being “handled” (for now), (b) Irma’s impact being less than expected, and (c) tensions with North Korea being walked back a bit. In response, traders appear to have covered shorts, fund managers are putting money to work, and everybody looks to be “buying the dip.”

Another historical tidbit that my friend Paul Schatz discovered is that the September swoon tends to depend on whether or not the market has been strong as the month began. In a recent blog, Paul notes that when the S&P 500 begins the month above its long-term moving average (150-day simple), September’s average decline of -1.1% turns into a gain of +0.5%.

I also find it interesting that the recent pullback seen in mid-August (which measured -2.2% on the S&P 500) would be the second shallowest decline seen in the second half of calendar years since 1980. In fact, per Ned Davis Research, over the last 37 years, the smallest correction seen between August and December has been -1.8% (2006).

In looking harder at the corrections that have occurred in the second half of calendar years, I find that the “state” of the market tends to play a role. You see, when more than 79% of the S&P’s 104 sub-industries are in good technical shape as of July 31, the ensuing declines have been much shallower than normal.

For example, since 1980, NDR tells us that the average decline seen in the second half of calendar years on the S&P 500 has been 10.1%. Of course, there were some whopper declines in there that skew the average such as the 33.5% drop seen in 1987, the 20.9% drop in 2001, and, of course, the dive of -42.4% in the latter half of 2008.

However, when more than 79% of the sub-industries are technically healthy as of July 31, the second half corrections have averaged just 6.4%. A marked improvement.

And yes, you guessed it; this year, the number of sub-industries that were technically healthy on July 31 was above 79%, with the reading coming in at 79.4%.

So, it is important to recognize that the “state of the market” tends to have some bearing on both the seasonal patterns and the pullbacks that occur in the second half of calendar years. Oh, and according to NDR, a cyclical bear market has never occurred in the second half when the majority of the sub-industries were technically healthy at the midway point of a calendar year.

Therefore, despite valuations being elevated, just about everyone preparing for the next big dive, and the seasonal pattern seeming to favor our furry friends in the bear camp, it probably makes sense to continue to give the bulls the benefit of the doubt. Well, at least until the bears can find a reason to be, that is.

Thought For The Day:

The secret of success is to be ready when your opportunity comes. – Benjamin Disraeli

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

    1. The State of the Tax Reform

    2. The State of the Economic/Earnings Growth (Fast enough to justify valuations?)

    3. The State of Geopolitics

    4. The State of Fed Policy