Will Negative Seasonality Spoil the SPX Party This Month?

VIX call buying should be monitored

Senior Vice President of Research
Sep 7, 2021 at 9:24 AM
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As just about everybody knows at this point, September is a seasonally weak time of year for the equity market, and the gauges from our Stock Seasonality tool below illustrate this trend. Over the last ten years, the week following the close on 9/3 has seen a median decline of 0.43% which ranks in the 15th percentile relative to all other periods.”

          - Bespoke, Sept. 3, 2021

Well, here we are, stocks have entered a seasonally weak period. But per the excerpt above, will it continue to be a weak period when “just about everybody knows at this point?”

Moreover, based on my observation on Twitter last week, the S&P 500 Index (SPX—4,535.43) may have reason to stall, as the index trades at a level that represents a round 300% return over the past 120 months, or rolling 10 years. The graph that I displayed showed the SPX stalling at 100% and 200% 120-month returns for brief periods in April and October 2018, respectively.

After the S&P 500 Index … experienced an initial rejection at 4,475 earlier this month, or double its March 2020 closing low, the resistance proved temporary, as the equity benchmark drove through it last week. A move above 4,475 would bring the next resistance area immediately into focus, with the round half-millennium 4,500 level a potential barrier. Moreover, the 4,507 level is a round 20% above last year’s close.”

          -Monday Morning Outlook, August 30, 2021

At the same time, the SPX is taking out resistance level after resistance level. This momentum, or energy, may last longer than anyone expects and continue to trump potential resistance levels or the negative seasonality that “just about everybody knows at this point.”

In fact, the SPX has traded higher for seven consecutive months through August. With negative seasonality upon us, I asked our Senior Quantitative Analyst, Rocky White to study past instances in which the SPX closed higher for five consecutive months as it entered the month of September. Has September tended to end such parties, or does the party continue?

On the table below that Rocky produced, in the only six instances in the past 50 years that the SPX had a monthly winning streak of five or more heading into September, the index closed higher during four of these months. The average return was 0.6%. This suggests that historically, positive momentum trumps negative seasonality in the few instances in the past 50 years that we have experienced a momentum scenario like this going into September.

SPX September Returns

If September is neither overwhelmingly bullish nor bearish and range behavior develops, I would expect support to come in between 4,475 and 4,507, which encompasses double the 2020 closing low, the round 4,500 level, and the level that corresponds with 20% above last year’s close. If this first area of support is breached, bulls should still continue to stay the course as long as the SPX remains in its channel or above its 50-day moving average, which is currently situated just below that channel and supportive of multiple pullbacks this year. Going back to late March, the SPX has closed within or above the bullish channel in all but three days, which is another signature of its impressive momentum higher.

2021 SPX Channel

During the holiday-shortened week, the top of this channel – or potential resistance – is between 4,570 and 4,583. The bottom of the channel ranges between 4,436 and 4,454.

Looking into option activity, one potential risk is the recent call buying relative to put buying on CBOE Market Volatility Index (VIX—16.41) futures options. In the graph below, note that the 20-day buy (to open) call/put volume ratio recently peaked at 2.40 -- around the same ratio as the high in April, which preceded the May volatility pop.

VIX pc ratio chart

The recent peak was coincident with the Federal Reserve and world central banker virtual meeting that is supposed to occur in Jackson Hole, Wyoming in the absence of a pandemic. With that event passing and not upsetting markets, I think the recent high reading may prove to have little meaning in the weeks ahead, as that activity on VIX futures options may have been hedges to an unknown outcome regarding Fed Chairman Powell’s remarks.

But high readings in this ratio have historically been pretty good at foreshadowing volatility spikes, so admittedly there is some apprehension on my part to tell you to totally ignore the recent option activity on VIX futures. If you are a short-term trader, the action would be to use call options in lieu of stock to express a bullish view so that you have less dollars exposed, but leverage to take advantage of continued upside movement. Or, have some put exposure as a hedge to a portfolio that emphasizes, and should emphasize, long positions. I continue to favor the bullish stance, since the technical backdrop has not deteriorated in such a way as to cause weaker hands with bullish views to panic sell.

Finally, Friday saw a bearish “tri-star doji” pattern, which occurs when the opening and closing prices are the same or about the same for three consecutive days. These are multi-day reversal patterns that have signaled short-term weakness a few times already this year, including late April.

Todd Salamone is Schaeffer's Senior V.P. of Research

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