Keystone's September Seasonality Factors for Trading the Markets

The month of September is typically down about 1.2% and is the worst month of the year for the Dow Industrials. September is typically a weak month for the over-the-counter and small cap stocks. In general, the largest market gains are realized November thru April with flat returns May thru October. Thus, the markets remain two months away from the start of the yearly strength period.

Typically, at the start of any month, the markets are bullish from the last day of the previous month into the fourth day of the new month which occurs for this month. OpEx Friday's are typically up; that is 9/19/14. Typically, during OpEx week, markets are bullish from a Tuesday low to a Wednesday high; that is 9/16/14 to 9/17/14, which corresponds to the Fed announcements on 9/17/14. OpEx Monday's, 9/15/14, are typically bullish.

Q4 (Oct-Dec) is strong for technology and biotech but that quarter remains one month away. Q3 ends this month on Tuesday, 9/30/14, so expect window dressing shenanigans late September. Window dressing is where funds and money managers sell losing stocks and buy winning stocks, especially at quarter's end, so the quarterly statements to clients appear that they are positioned properly in the correct stocks that are outperforming. September results are important since if Q3 is up for the markets, Q4 is up about 74% of the time. July started at 1960-ish for the SPX so price is almost 50 handles above with 3-1/2 weeks yet to play out in this volatile month. September began at 2003.37 so pay attention to this number near the end of the month as well as the Q3 starting number at 1960.23.

Drilling down for September, as a blanket rule, this month is the worst month of the year for stocks. The first Friday is typically a triple digit day for the Dow Industrials, largely due to jobs data. For last Friday, the Dow gains 68 points a healthy gain but not triple digits. Congress is returning next week for two weeks so this is bearish for markets.

Mutual funds rebalance their portfolio's each year in the late September early October time frame. The high in 1929 was marked by the day after Labor Day, thus, this day can be a tumultuous turning point each year. Labor Day may chart the path forward for stocks into year-end. Typically, markets move down between OpEx (9/19/14) and mid-October. As a rule, traders tend to avoid buying stocks between September and mid-October.  The week after OpEx in September has been down about 80% of the time so keep this in mind for the week of 9/22/14.

An old Wall Street adage is "Sell Rosh Hashanah and buy Yom Kippur," although some traders will hilariously tell you the opposite. Rosh Hashanah begins at sundown on 9/24/14 and Yom Kippur is 10/4/14. The adage has a good track record say at about a two-thirds (65%) success rate over the last couple decades. So you may want to stroll the short side of the market from the back half of September into early October.

For commodities, typically you sell natty around Labor Day and buy oil. Natty is bot again in May for the summer air conditioning season. Natural gas has struggled in recent months due to the cool summer. August through October is typically up for gold. September is the Indian marriage season and India consumes one-third of the world's gold supply. China gold sales also pick up during this time period. Typically, September is a good month to buy steel and steel stocks have been well bid recently.

Even though history tells us that September is the worst month, in recent years, the SPX is up 8 of the last 10 years for the month of September; the bad years are the financial crisis in 2008 and the budget crisis in 2011. September 2010 was the best September since 1939. The last couple days of this month the markets typically see a pull back of almost one-half percent, about 10 SPX points. Watch back-to-school spending since this is a preliminary indicator for holiday sales.

On the esoteric side, there is a full moon on Monday, 9/8/14, and markets are typically bullish moving through a full moon each month. The new moon is 9/23/14 and the stock market tends to sell off through the new moon period say 9/22 through 9/24. There are no Bradley turns until 10/7/14. Keystone's Eclipse Indicator targets the potential for a large broad market sell off to begin around 9/15/14, give or take one week or two on each side, thus, between 9/5/14 and the end of the month at 9/29/14. Another window will open for a potential large market sell off between 10/31/14 and 11/28/14. If the large sell off occurs in September then the November time frame will likely become moot.

The Fed plans to end QE Infinity in October. The stock market started selling off 4 to 6 weeks ahead of when the prior quantitative easing programs ended. That places the stock market vulnerable as traders finally realize that the Fed punch bowl will be empty next month. (Fear not, however, since the Fed is maintaining the ZIRP Forever policy until the middle of next year or longer.) Also of interest is the third year of a presidential cycle on tap ahead and seasonality-wise, decades of data indicate that October 2014 through the Fall 2015 should be a strong period for the stock market. This is typically due to the incumbent president hitting his stride with spending programs and passing out large cardboard checks, however, suffice it to say the world is far different currently tangled in war, conflict and disease. Nonetheless, long traders and permabulls that have been correct to the present as the stock market prints new highs may cheer lead the presidential cycle moving forward.

In conclusion, September is the worst month of the year for the markets, typically down about 1.2%. Labor Day is a key pivot point for the intermediate market trend. Interestingly, the SPX, Dow Industrials and Dow Transports are all at record all-time highs. Congress is returning and will be back in session which is bearish. The week after OpEx, 9/22/14 through 9/26/14, is typically down 80% of the time. Watch for Q3 window dressing during the final days of the month which will buoy stocks but the last day or two should finish weak.

Using the seasonality factors alone, the bulls are favored early in the month with the bears heavily favored in the back half of the month. The Fed news on 9/17/14 will greatly affect market direction.