Is September Seasonality Signaling Doom and Gloom?

If history is any guide, the U.S. equities market could be headed for more trouble in September

by Karee Venema

Published on Sep 1, 2015 at 2:02 PM
Updated on Sep 1, 2015 at 2:11 PM

The U.S. equities market just wrapped up its worst month in years, with the Dow Jones Industrial Average (DJIA) notching its heftiest monthly loss since 2010, and the S&P 500 Index (SPX), and Nasdaq Composite (COMP) falling by the most since 2012. The CBOE Volatility Index (VIX), meanwhile, more than doubled -- thanks to its biggest weekly percentage gain on record.

With the dismal August in the books, what can Wall Street expect in September -- besides a highly anticipated central bank meeting? The historically bearish month has gotten off to a rather unpleasant start, and if past is precedent, the market could be in for some more turbulence over the next several weeks.

Specifically, Schaeffer's Senior Quantitative Analyst Rocky White looked at how the various benchmarks performed after a 5% drop in August. Since 1907, for example, the Dow has shed at least 5% in August 13 times. In the subsequent Septembers, the blue-chip barometer has averaged a loss of 2.5%, and is positive just 38% of the time, versus an average anytime loss of 0.9%, with 44% of them being positive.


Meanwhile, the SPX has logged a 5% or more deficit in 12 Augusts, going back to 1939. In the following September, the broad-market index has averaged a loss of 2.4%, and is positive just one-third of the time. Compare this to its average anytime deficit of 0.3%, with the SPX positive about half of the time.


Unfortunately, things don't get much better when looking at the tech-heavy Nasdaq Composite (COMP). Since 1974, the COMP has shed 5% or more eight times in August, leading to an average September loss of 4.1%. What's more, the tech-heavy index has been positive less than three-quarters of the time. This, compared to an average anytime loss of 0.7%, with about half of those results being positive.


It doesn't appear as if small-caps get a break, either. In the five times the Russell 2000 Index (RUT) has plunged 5% or more in August looking back to 1981, the index has averaged a loss of 1.9% in the subsequent September, and is positive two-fifths of the time. This is a much wider deficit than the average anytime loss of 0.5%, with the RUT positive 56% of the time.


Volatility traders, however, could be in luck. In the five times the SPX has dropped at least 5% in August, the CBOE Volatility Index (VIX) has averaged a September gain of 9.3%, and is positive 40% of the time. This seems to be par for the course, though, considering the market's "fear gauge" boasts an average anytime September return of 9.2%, and is positive 52% of the time.


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