The Extra Bearish September Signal?

It was the wrong day to plunge for the Dow Jones Industrial Average (DJIA), S&P 500 Index (SPX), Nasdaq Composite (COMP), and Russell 2000 Index (RUT)

by Andrea Kramer

Published on Sep 2, 2015 at 2:45 PM
Updated on Jun 24, 2020 at 10:16 AM

September started on a rough note, with the major market indexes falling back into correction territory. While it's a relatively known fact that September has been the worst month for stocks historically, data from Schaeffer's Senior Quantitative Analyst Rocky White suggests that after yesterday, the worst might not be over for the Dow Jones Industrial Average (DJIA), S&P 500 Index (SPX), Nasdaq Composite (COMP), and Russell 2000 Index (RUT). In fact, it seems a bearish start to most months can be a bullish signal for the indexes -- but an extra bearish signal in September.

The Dow has surrendered 2% or more on the first trading day of September just six times since 1900, including yesterday's 2.8% plunge. In these instances, the blue-chip barometer has ended September higher just one-third of the time. Excluding those instances, the Dow has ended September higher just under half the time.

As alluded to earlier, it seems a severe start to September bodes much, much worse than a severe start to any other month. When the Dow has started the month -- outside of September -- down 2% or more, the index still averages a monthly gain 63% of the time, which is better than its anytime monthly stats (positive 57% of the time). In fact, when the Dow suffers a big first-day drop in any other month, its average monthly gain jumps to 2.4% -- compared to a mere 0.4% any other time.

150902Dow

The case is even more evident for the SPX. When the broad-market barometer drops 2% or more in September -- which has happened just a handful of times since 1928 -- the index has clawed its way to a monthly gain just 20% of the time. Any other month, a rough start increases the odds of a monthly gain -- to 62% from 58%.

Again, the average gain after a rough start to the month -- excluding September -- is more than triple the SPX's anytime monthly return: 1.4%, compared to 0.4%. In September, the average monthly loss is 0.8% in "normal" times, and plummets to 5.3% after a drop of 2% in the first trading day.

150902SPX

The tech-heavy COMP has only suffered two drops of more than 2% on the first trading day of September, going back to 1972. The last time this happened, the COMP ended the month 7.9% lower. "Normal" Septembers have been positive 61% of the time for the index, but average a much slimmer loss of 0.2%.

Continuing our trend, a major drop to start any other month increases the odds of a month-over-month gain -- to 63% from 58%. The average gain after a rough start is a healthy 3.6%, compared to the COMP's anytime monthly return of 0.7%, on average.

150902COMP

Small-caps aren't excluded, either. The RUT has started September with a loss of 2% or more just three times since 1979, and has ended the month higher just one-third of the time afterwards. The average monthly loss after these starts is 1.8%, compared to 0.4% in other Septembers.

Unlike the others, though, starting any other month on the wrong foot doesn't change the odds of a monthly rally, which stay at 61% no matter what. A big drop, however, does boost the average RUT gain more than fivefold -- to 3.6% from 0.72%.

150902RUT

So, should we be rooting for a horrible start to October, or…?


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