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Yes, September is still a few weeks away – thank goodness, because I for one am NOT ready for summer to end.  But it’s always a good idea to plan ahead.  With the stock market having staged a big advance so far this year and with a few supposed signs of “topping action” (whenever I hear that phrase it always makes me think about chocolate, but enough about my addictions), it makes sense to note the by now not little known fact that historically the month of September has by far been the worst performing month for the stock market.

Figure 1 displays the grim tale quite clearly.  This chart displays the cumulative gain or loss registered by the Dow Jones Industrials Average during each calendar month starting in 1955.

Figure 1 – Cumulative % Gain for each calendar month (January 1955-Present)

As you can see, while May, June and August also registered net losses (of -10.6%, -20.9% and -11.6%, respectively), the Dow has lost a cumulative -49.1% during the month of September.  So the obvious question is “should we sell now and buy back on September 30^th?”  Well, not necessarily.  For the record, the Dow has gained ground in 6 of the last 8 years during the month of September, gaining at least +2.3% or more on 5 of those occasions.  So remember, the message here is not that the stock market is sure to lose ground during September.

Still the overall performance of the Dow during the month of September – as displayed in Figure 2 – has not been a very pretty picture.

Figure 2 – Cumulative Dow % Loss during September (1955-Present)

 September – Labor Day Period versus Rest of Month

A closer at September look reveals that if something good is going to happen in the stock market during September, it is far more likely to happen before mid-month.  The early part of September revolves around Labor Day and as I wrote about in my book “Seasonal Stock Market Trends”, the stock market has showed a strong tendency to perform well during the three days before and the three days after market holidays.

Figure 3 displays the growth of $1,000 invested in the Dow during all pre and post Labor Day trading days that fall in the month of September (blue line) versus all other September trading days (red line).

Figure 3 – September Trading days that are within 3 trading days of Labor Day (blue line) versus all other September trading days (red line)

-The “holiday” trading days witnessed a meager cumulative gain of +10.6%

-All other September trading days registered a cumulative loss of -54.0%

 September – A Tale of Two Time Frames

With the obvious caveat that there is no guarantee that history will hold true this time around, the fact is that the latter part of September can be a pretty brutal affair.  Figure 4 displays the cumulative loss for the Dow during Trading Days #1 through 14 during September (blue line) versus Trading Days 15 through 21.  As you can see, the red line has had very few big “ups” and a whole lot of “downs”.

Figure 4 – Growth of $1,000 invested in Dow during September Trading Days #1-14 (blue line) and September Trading Days 15-21 (red line)

-September Trading Days #1 through 14 have registered a cumulative loss of -6.7%.

-September Trading Days #15 through 21 have registered a cumulative loss of -45.4%.

Summary

So back to the original question – “should we sell everything now and come back at the end of September?”  Well, the truth is that there is no way to know what will happen during the month of September this time around. But history strongly suggests that a bit of caution may be in order.  Some choices to consider include:

-Selling some stock positions and moving the proceeds to cash.

-Selling covered calls to generate some income in case your stocks move sideways to lower.

-Buy an inverse stock index fund (to make some money if the stock market declines).

-Do nothing and hope for the best.

Hey, have a nice month!

Jay Kaeppel