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.
Figure 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.
Figure 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
