Stock Market Cruising through the Danger Zone (So Far)

  • SumoMe

The September/October period has often been a difficult one for the stock market.  I wrote about this long-term trend here and here and discussed a simple hedging method here.

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 Industrials Average each year since 1955 only during the last 13 trading days of September and the first 19 trading days of October.1Figure 1 – Growth of $1,000 invested in Dow Jones Industrials Average during last 13 trading days of September through October trading day #19; 1955-2016

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 being said, the 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.

2Figure 2 – QQQ hedge position using options (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 inorder.

Jay Kaeppel

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