The September/October period has often been a difficult one for the stock market. I've written about this long-term trend and discussed a simple hedging method.
This time around? No problem. Since the close on 9/13, the stock market has been moving higher and the Nasdaq 100 has actually broken out to the upside. So has all the angst and concern been for naught?
I have to go with my standard answer here: “It beats me.”
Still, here is one thing I do know: When September/October is good, it’s not bad. But when it’s bad it’s very, very bad. So remaining cautious is still not the worst idea in the world.
The History
Figure 1 displays the growth of $1,000 invested in the Dow Jones Industrial Average each year since 1955 only during the last 13 trading days of September and the first 19 trading days of October.
As you can see, the long-term results are not pretty (a cumulative loss of -61%). Still, it needs to be noted that the stock market does not go down every single year during this period. In fact it is relatively close to 50/50. It’s just that when there is a decline it tends to be “one of the painful kind”.
Here are the numbers for the last 13 days of September plus first 19 days of October (since 1955):
- Number of times up: 28 (47% of time)
- Number of times down: 32 (53% of time)
- Average up period: +3.7%
- Average down period: (-5.6%)
- Cumulative %+(-): (-61%)
The Current Year
Since the close on 9/13/2016 the Dow is up +1.3% and the Nasdaq 100 is up +2.8%. Which way from here? Once again, “It beats me.” Believe me, I am not “rooting” for the market to decline. That said, the PowerShares QQQ Trust Series 1 (NASDAQ:QQQ) hedge I wrote about on 9/8 Remains a good low-cost insurance policy. The current status of that position appears in Figure 2.
(Courtesy www.OptionsAnalysis.com)
As long as stock prices keep moving higher then “all is well.” But if the current rally fails – particularly if the Nasdaq 100 reverses its upside breakout and moves back below the previous high – then a bit of “caution” may definitely be in order.