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The September Effect

The September Effect is a popular seasonality trend that suggests weakness in the stock market during the month. Although not every year is the same, stocks have witnessed losses during September.


The weak period during September may be a market anomaly since the stock market has a built-in long-term upward bias.


Some believe the reason for the September Effect is investors returning from summer vacation are inclined to take gains and tax losses ahead of the end of the year. Another school of thought for the monthly phenomenon is investors tend to sell stocks during September to pay for school costs and expenses.


Other theories suggest that in anticipation of another weak September, traders sell before the occurrence. Also, institutional investors and money managers tend to exaggerate market volatility by selling as the third trading quarter ends, locking in profits before year-end. Another possible reason for the monthly weakness is many mutual funds harvest tax losses toward the end of the quarter.


Whether the historical weakness each September comes from the seasonal behavioral bias from retail and institutional investors remains debatable.


However, many economists and market professionals discount the existence of the September Effect. They believe the markets are inherently unpredictable. Anticipating the September Effect is useless since you can find any period that has been profitable or unprofitable.


Although seasonal tendencies may or may not influence stock market returns, recognizing that they can repeat is far less important than understanding that these tendencies can occur.

Studying the seasonal trends allows investors to make confident and informed trading and investment decisions. Although seasonal trends can increase the probability of the outcome, it is not guaranteed.

It must not be deployed alone but with other technical disciplines (i.e., trend lines, moving averages, and other technical indicators). Investors also should not trade against the primary and prevailing trends.

So, what are the seasonality studies saying about September?

In the past 20 years, September has generally been down for most stock market indexes, reinforcing the ominous September Effect.

The benchmark large-cap S&P 500 Index (SPX) is up 55% of the time each September. However, it suffered average losses of 0.5% during September over the past 20 years. The blue-chip Dow Jones Industrial Average (INDU) closed higher 50% of the time with average losses of 0.2%. The broad-based listed NYSE Composite Index (NYA) closed 55% higher, with average losses of 0.5% for the month.

The growth-related Nasdaq Composite Index (COMPQ) also suffered losses during September. Over the past 20 years, COMPQ closed higher 50% of the time with average declines of 0.4%. The mega-cap technology-laden Nasdaq 100 Index (NDX) also recorded losses 50% of the time, with an average loss of 0.2% during September.

The Mid-cap 400 Index (MID) recorded a higher close 50% of the time during September, with average losses of 0.7%. The Small-cap 600 Index (SML) also closed higher than it opened 55% of the time, with average losses of 0.3% for the month. Micro-cap markets or the iShares Microcap ETF (IWC) closed higher 53% of the time but averaged losses of 0.2%.

International stocks showed mixed performances for September. The MSCI EAFE Index (MSEAFE) closed higher 60% of the time, with average losses of 0.4% for September over the past 20 years. MSCI Emerging Markets Index (MSEMF) fared better, closing the month higher 55% of the time with flat returns.

Interestingly, at the end of October, stock markets recorded impressive rebounds. The October returns for the past twenty years ranked by gains are NDX (1.8%), COMPQ (1.4%), INDU (1.3%), SPX (1.1%), SML (1.0%), MID (0.9%), NYA (0.8%), MSEAFE (0.4%), MSEMF (0.4%), and IWC (0.1%).

Most S&P 500 sectors also performed poorly during September, with the best performers coming from XLE (0.2% gains), XLI (0.1% gains), and XLY (-0.0%). The rest of the S&P sector fell during September, including XLB (-1.0%), XLC (-1.0%), XLU (-0.7%), XLRE (-0.5%), XLF (-0.4%), XLK (-0.3%), XLV (-0.3%), and XLP (-0.2%). The August performances favored the cyclical and commodity sectors, including XLE, XLI, and XLY.

In summary, August tends to be a challenging month for most major stock market indexes. The exception is the MSCI Emerging Market Index (MSEMF), recording flat returns during September. Three S&P sectors outperformed their peers during September, including XLE (0.2%), XLI (0.1%), and XLY (0.0%).

Will September be another challenging month?

Will the September correction lead to another impressive October?


Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com


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