September is the toughest month for stocks, but this time could be different
A view of the New York Stock Exchange Building on Wall Street in Downtown Manhattan in New York City.
A view of the New York Stock Exchange Building on Wall Street in Downtown Manhattan in New York City.
Roy Rochlin | Getty Images Entertainment | Getty Images
September is the worst month, and it could not matter.
It’s an previous dealer noticed: September is the worst month of the 12 months.
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It’s true, since 1945 September has been the worst month, on common, for the S&P 500:
S&P 500: worst months
(Avg. since 1945)
September down 0.56%
February down 0.15%
August up 0.03%
Source: CFRA
Here’s the downside: it hasn’t labored very properly lately. September has been up three of the final 4 years:
S&P 500: September
2020: down 3.9%
2019: up 1.7%
2018: up 0.4%
2017: up 1.9%
Quite a lot of the previous seasonal buying and selling guidelines (promote in May and go away, the January impact, greatest six months commerce, and so on.) haven’t labored as properly in the previous few years.
Some imagine these previous saws are being disrupted by the oceans of money the Federal Reserve has been showering on the economic system since the monetary disaster in 2008.
“There is a lot liquidity on the market,” Art Cashin from UBS informed me.
September setup: about nearly as good because it will get
Regardless of September fears, the setup is about nearly as good because it will get. The three problems with most concern to inventory merchants — earnings and the path of earnings estimates, revenue margins, and rates of interest — are all aligned favorably:
Why shares are at new highs
Earnings: document
Earnings estimates: nonetheless rising
Margins: document
Interest charges: stay low
Strategists have been significantly impressed with the steadily rising earnings estimates
“[I]t seems that we now have underestimated the earnings energy of US shares but once more regardless of bumping up our 2021 EPS goal again in May,” BMO’s Brian Belski wrote in a observe to purchasers. “And with analysts persevering with to lift annual EPS estimates we imagine our present EPS goal is once more seemingly too low.”
Another consider the markets rally has been persistent rotation into and out of key teams.
For a lot of the first half of the 12 months, small-cap shares outperformed big-cap shares, and worth (largely industrials, supplies, banks, and power) outperformed development (largely expertise).
That has reversed in the third quarter, as huge caps and development have returned to dominance:
Q3: Major indices
S&P 500: up 5%
S&P Small Cap: up 2.0%
Growth: up 8%
Value: up 2%
What’s to not like?
Even with the market at new highs, there are indicators that the rally is being pushed forward on fewer shares. Traders all the time favor “broad” rallies, so this is an indication of some concern.
NYSE Advance/Decline line: topped in June. With the S&P 500 at new highs, this is an indication the rally is getting extra selective.
New highs: peaked in March. “Fewer shares are in a position to maintain tempo with the main indexes and this leaves the market in a fragile state, prone to will increase in Supply,” Michael Kahn from Lowry wrote in a current observe to purchasers. Lowry is the nation’s oldest technical evaluation service.
Momentum (S&P shares above 200-day transferring common): peaked in February. Steadily declining because it hit a prime in February, at 91%. Now solely 58% are above their 200-day transferring common.
What’s all this imply? The markets are remaining at new highs, but solely as a result of we’re again to the scenario the place a small group of the largest firms are holding the market afloat.
The S&P 500 is up 5% this quarter, but the 5 largest shares in the S&P are up a median of 10.2%.
Five largest S&P 500 firms
(QTD)
Apple: up 12%
Microsoft: up 12%
Alphabet: up 18%
Amazon: flat
Facebook: up 10%
Meantime, many shares are lagging. Only 62% of the S&P 500 is up this quarter.
The ‘limitless bid’ in the markets
Far from being comfortable, many merchants are baffled by the relentless transfer up in shares.
“There’s simply an limitless bid to the markets,” one dealer who requested to stay nameless informed me.
The downside: Even as they acknowledge the sturdy earnings backdrop, the mixture of the Fed and the delta variant tells many the markets ought to be decrease.
Jonathan Corpina at Meridian Equity Partners Traders stated he understood the apprehension, but up to now the markets are selecting to place a constructive spin on each the delta variant and the Fed.
“The market is telling us that the Covid variant is not going to close down the economic system, and Powell has now satisfied everybody that there is little or no likelihood of the Fed out of the blue elevating charges,” he informed me.
