Should Investors Be Spooked by Fall Seasonality?

Breaking down the seasonal returns in September and October

CMT, Senior Market Strategist
Sep 20, 2021 at 8:38 AM
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The S&P 500 Index (SPX -- 4,432.99) oscillated between the 20- and 50-day moving averages throughout the week as we worked through September options expiration week, while keeping market participants on the edge of their seats amid debates on whether the momentum of the current trend will continue or if we're finally on a precipice of a larger pullback. As we’ve previously discussed in recent Monday Morning Outlooks, we all know we are in one of the most volatile periods in the equity markets from a historical perspective. Spooky fall seasonality makes for great headlines since long-term data supports it, but that makes it a good time to review the most recent data on how the next few weeks could play out, since we all know markets do change over time.  

chart 1 mmo

First, let’s delve back into last week’s price action to further  review what might be on the horizon. When looking at the S&P 500 ETF Trust (SPY -- 441.40), it continued its downward trajectory after being rejected at the +20% year-to-date level and limped into the weekend, closing Friday at the lower end of the price channel trendline that we’ve been monitoring for the past few months. Moreover, this is the eighth test of the 50-day moving average this year, and all have held except for one that had a one-day move lower, only to find support at the 80-day moving average and pop back above the 50-day rather quickly. Although it’s been a phenomenal buy-the-dip spot throughout the year, we know it will eventually end like all other trends, but is this the time?

“…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.”

  -Monday Morning Outlook, September 7, 2021

There is potential it could be, but we could also see a gap up Monday that negates further downside as the SPY heads right back up to test the +20% YTD level once again. If we are to trade to the downside early next week, we have major support coming in right at the 80-day moving average at 4,367 on the S&P 500 Index, which happens to be nearly the exact spot of the +100% level from the pandemic lows. Beyond that, the next key level I’d be watching is the 4,250 area for a bounce if the seasonal headwinds play out.

“…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.”

  -Monday Morning Outlook, September 7, 2021

chart 2 mmo

To dive a little deeper into the seasonality, we ran data from 2010 on various timeframes for the next two to six weeks to see how the market has reacted to the so-called fall swoon in recent years. First, you can see the market was positive over the next four weeks through October options expiration 64% of the time with a median gain of 1.83%. Secondly, the toughest two weeks appear to be right in front of us through the end of the month, as returns were only positive 36% of the time with a median drop of 0.54%, but an average negative return of 0.91%. Finally, returns through the end of October have been positive 64% of the time, with a median return of 1.52%. So, what gives with all the fearmongering about October? What everyone remembers though, is the two larger drawdowns through mid-October from 2014 and 2018 – the only two corrections that were greater than 5% in recent times. This is natural as humans often remember negative impacts psychologically more prominently.

chart 3 mmmo

Next, we take a look at how this compares to 20-year returns during these periods. The four weeks following September OPEX averaged a negative return of 0.47% on the 20-year data, but it’s not overwhelmingly bearish as the median return is still positive. Nothing is screaming that this isn’t just another opportunity to buy the dip with defined risk, as returns are positive through the end of October, albeit slightly.

chart 4 mmo

Bearish sentiment extremes have been fairly rare this year since we’ve been grinding higher, but we did see an extreme this past week, giving way to a potential catalyst that could be bullish for contrarians. The AAII sentiment survey bullish sentiment reading plunged from 38.9% down to 22.4%. This was the lowest level since June 2020 and is in the 5th percentile of all prior readings. Furthermore, the bearish sentiment put in its highest reading recorded since last October, surging from 27.2% to 39.3%. This scenario is similar to 2019, when survey participants got extremely bearish heading into October, expecting a large correction only to see a minor pullback before rallying into year-end. Furthermore, the SPX Components 10-day buy-to-open put/call ratio is moving towards its recent range highs. A slight move higher towards the 0.50 level may be all we need for a bounce in equities.

xhart 5 mmo

Many will continue to sound an alarm that this gloomy seasonal period could set off a larger pullback; I don’t see a reason to run to the sidelines just yet. If we don’t see a rally next week off the price channels lower rail and 50-day moving average early next week, we still have a few solid support levels just below us that easily could set us up for a snapback rally on any weakness. Thus, we need to remain tactical in the very near term but should continue to look for buying opportunities until we see a larger trend change.   

Matthew Timpane is Schaeffer's Senior Market Strategist 

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