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Could September and October spell trouble for stocks?

The S&P 500 has often hit a rocky patch during September and October, with many of these pullbacks seen during similar market conditions to those now.
The S&P 500 has often hit a rocky patch during September and October, with many of these pullbacks seen during similar market conditions to those now.
Photo by Spencer Platt/Getty Images

With the S&P 500 running above the upper trend line the time of year could be of concern. Although September and October have not fared the worst in overall losses, many of the most volatile market moves occurred during the two months. Many of those moves also occurred during similar market conditions that are present now.

September has finished the most total times with monthly losses. It has finished lower 31 times since the S&P 500 became an index on March 4, 1957, or 54.38% of the time. Based on the overall index move higher from the S&P 500’s birth to the last day of July 2014, it has yielded a 6.59% loss during that time, second only to August’s 10.95% loss. The August and total results did not include August 2014, as it had yet completed prior to publication.

October has fared much better overall, finishing lower only 22 times or 38.60% of the time. It also has the fifth highest overall yield at 17.13% and is one of only five months to boast double digit returns. Even though it has fared better than most months overall, it holds many of the largest drops seen on the index.

Drops in October account for the two largest monthly percentage losses on the S&P 500. Along with September the two combined for four of the six largest and six of the 12 largest monthly drops. They also hold over a quarter of the largest monthly percentage drops in the top 40 with 11.

October also holds the two largest daily percentage losses along with five of the top seven. With September they combine for six of the top seven, nine of the top 15 and 40% of the 50 largest daily percentage losses with 20.

The index has seen 331 volatile daily moves lower, with research defining volatile daily moves as those sessions with 2% or greater gains or losses. September and October hold nearly a quarter of the volatile losses with 80 or about 24.17%. The index has seen 339 volatile moves higher, with September and October accounting for 21 of those higher moves or about 6.19%.

If these volatile moves were split evenly between the 12 months, we could expect to see on average about 8.33% of these volatile moves higher or lower during any month. This being the case, the data shows the index is about three times more likely to see a volatile drop during the September through October timeframe. It also shows it is slightly less likely the index will see a volatile rebound.

Volatility is generally a bearish indication. Volatile conditions are common during bearish retreats on the index, and mostly absent during bullish runs.

When many of these large drops occurred during these two months is a concern given the current conditions of the index. Many of these drops occurred in breaks lower or continued falls from runs above the upper trend line. Some examples are listed below; unless otherwise noted, the periods below are based on the percentages of the drop.

In Sept 1960 it was during a significant pullback after a drop from the upper trend line. Although that drop is number 46 today, to that point it was the second largest monthly loss seen on the index.

One of the largest weekly falls was seen in Oct 1973. After the index had broken lower from a run above the upper trend line, the index reversed from a rebound it had seen earlier in the month and broke steeply lower. The index fell below the lower support line leading into that crash. Later in that crash the largest monthly losses to that point and the fourth largest today were seen during the Sept 1974 fall into crash lows.

In Sept 1986, to that point the sixth largest monthly loss was seen in a significant pullback from above the upper trend line. Then in Oct 1987, the largest monthly loss ever seen on the S&P 500 occurred after the index had rebounded back above the upper trend line from the 1986 drop, only to fall steeply back to the lower support line in that crash. This crash is often referred to as the flash crash, because of how quickly it occurred and finished.

Another large drop was seen in Oct 1998 when the index broke lower from a breach of the upper trend line. That drop had started much earlier, but the October lows carried to a low that establish the lower support line in that bullish run higher. A year later, in Oct 1999 a break from the upper trend line finished with a large weekly drop that found support at the lower trend line.

After breaking lower from a run above the upper trend line, in Oct 2000 the index breached the lower support line during an over 80 point intraweek drop. That slide regained over half of the week’s losses on Friday so it is not one of the largest seen, but that breach sent the index lower. After that drop the lower support line established in the Oct 1998 downturn turned from support into resistance that the index was not able to break back above. The crash that followed later saw two large monthly losses, the 22 largest in Sept 2001 and again in Sept 2002 with the sixth largest.

In 2007 the index began to turn lower off the Oct 8 high during a run above the upper trend line, although not a top monthly loss, the downturn reached a significant level and ultimately led into the crash. A year later the index saw the second largest monthly losses ever in Oct 2008.

There are other occurrences were the index turned lower from breaks above the upper trend line or near the upper trend line during these two months. Downturns during the two months can also be seen in breaks from above the upper trend line in older market indexes like the Dow Jones. Probably the most famous downturn began on Oct 24, 1929.

None of this means a large drop will be seen in September or October this year. September and October are not the only months to see large losses in breaks lower from runs above the upper trend line and the two months also have some large losses during other times. They have also performed bullishly in the past.

However they have shown a larger presence in breakdowns or continued falls in drops from above the upper trend line than the other months. The current conditions also coincide with possible topping patterns seen in the S&P 500 constituent charts and research that has indicated a large drop on the index could be seen from 2000 to 2140, with the greatest potential for this drop at 2040. Since the index has broken above 2000, it therefore has entered into a potentially dangerous level. Being so it seems reasonable to show some extra caution during this time period.

If a large drop were seen during the September to October timeframe, the index most often rebounds bullishly during November and December from these drops, even if the stock market continued lower later. The early part of November often still sees losses before these rebounds begin. This was even the case in 1929 crash.

It seems unlikely that the stock market would fall to crash levels in a retreat at this time. Although chart formations make a correction in the range of 10% to 18% seem possible.

The stock market is likely to rebound bullishly from this setback even if it were to reach crash potentials. The data continues to indicate the stock market has entered a secular bull market that could last 12 to 20 years or longer. Breaks of secular bear markets like that seen when the S&P 500 pushed well above the resistance near the 2000 and 2007 tops also generally signals a secular bull market has returned.

If a crash is seen, it is likely many will claim it is a return to a secular bear market. Secular bull markets have crashes. In a secular bull market crash stocks rebound from the crash near and sometimes below the lower support line, they then rebound back into trend and continue to new highs.

Whereas in a secular bear they tend to break through the lower support line and fail to rebound back above it before dropping much more deeply. They also tend to trend somewhat lower or stay flat for many years. It is not impossible that the stock market could fall back into a secular bear, but it seems very unlikely.

Data provided for the S&P 500 was derived from the historical daily data tables, similar data can be found at Google Finance.

Stock charts used for analysis and commentary were provided by ScottradeELITE or from those Ron made from his data tables, many of which are available in past slideshows. Similar charts can also be found at Big Charts.

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Thank you Glenn for your questions that led to this article.

Have a great day trading,
ronz

Disclosure: Ron is currently about 75% invested long in stocks in his trading accounts and near levels he had planned to be at this time. Although there appears to be many reasons to believe a large drop could be forthcoming; even if he was 100% certain the stock market would retreat largely, which of course he is not, due to his investment strategy he would not go flat before or into this retreat.

Disclaimer: The information provided in this article is Ron’s perception of the current conditions and what he thinks is the most probable outcome based on the current conditions, the data collected and extensive research he has done into this data along with other variables. It is intended to provoke thought of the possible market direction in his readers, not foretell the future. Ron does not claim to know what the stock market will do. If the stock market performs as expected, it only means he is applying the stock market history to the current conditions correctly. His perception of the data is not always correct.

This article is intended to provoke thought about investment possibilities. Acting on the information provided is at your own risk. You are urged to do your own research, and where appropriate, seek professional investment advice before acting on any information contained in these articles.