The Signpost Up Ahead: The September Danger Zone

  • SumoMe

Investors may soon take a “Ride into the Danger Zone” as the middle of September passes into late September.   There are several reasons to be wary.  In terms of overall Dow performance the month of September ranks #12 (out of 12).  Also – and as we will see in a moment – performance often gets worse as the month wears on.  While there is no guarantee that things will end badly this time round, it does make sense to recognize the potential danger and to prepare accordingly.

More specifically, present concerns include:

1) The S&P 500 is below its 200-day moving average

As you can see in Figure 1, there is no reason to panic as sometimes a price break below the 200-day average is just temporary.  But the fact remains that major bear markets play out with price below the 200-day moving average.  So for the moment, the trend is “down” and investors (and traders) should respect the trend.

0Figure 1 – SPX below 200-day moving average (Courtesy: AIQ TradingExpert)

2. Triangle pattern forming

As you can see in Figure 2, price action for SPX is forming an ever tighter triangle formation.  Investors and traders should pay close attention to see if price breaks to the downside.  If it does breaks out to the downside between now and the end of September, extreme caution is then in order as a sharp decline could unfold quickly.

1Figure 2 – SPX Triangle – Which way the breakout? (Courtesy: ProfitSource by HUBB)

Historical Dow Performance after September Trading Day #13

Between the end of September Trading Day #13 and the end of the month, the performance of the Dow has been very poor over the past 60 years.  To wit, see Figure 3 which displays the growth (?) of $1,000 invested in the Dow Jones Industrials Average only between the close of September Trading Day #13 and the end of September, every year since 1955:

2Figure 3 – Growth of $1,000 invested in Dow ONLY after September Trading Day #13 through the end of September (1955-Present)

For the record:

*$1,000 invested in the Dow only between the end of September Trading Day #13 and the end of the month declined to $553 (a loss of -44.7%)

*# Times UP = 20 (33.3% of the time)

*# Times DOWN = 40 (66.7%)

Average UP period = +1.23%

Average DOWN period = (-2.05%)

# Times UP period gain exceeded +2% = 3

# Times DOWN period loss exceeded -2% = 16

# Times UP period gain exceeded +3% = 1

# Times DOWN period loss exceeded -3% = 10


The good news is that there is no guarantee that the stock market will fall between now and the end of September.  The bad news is that it does have a pretty ugly history of doing just that.  For the record, the 13th trading day of September 2015 is 9/18/2015.

With the price trend currently “down” and a history of “falling hard” during this time period, a break out to the downside from the current triangle forming in SPX should not be ignored as a warning sign of a “clear and present danger”.

While I am hopeful that the market will break to the upside, and that none of these concerns will matter, the truth for now is that – in the immortal words of Dorothy Gale – “I’m frightened Auntie Em, I’m frightened.”

Jay Kaeppel