If the S&P 500 has a favorite month, September certainly won't be it. Historically the index has always had problems this time of year. This is what is known in the market as the "September effect." And judging by a couple of technical indicators, the effects this year are likely to be harsh. So in today's lesson for your investment training, we're going to look at what it can mean for the markets and how we can prepare for a difficult month...
What is the September effect?
If we look at the average monthly profitability of the S&P 500 since 1928, we see how September produces the largest drop on average, close to 1%. There are only two more months in which the average was negative, in February and May. Although its falls compared to those of September are minimal, barely touching 0,10%. The rest of the months, on average, recorded profits.
The September effect has also occurred in the world's main stock markets and in the other major US indices. Nasdaq has seen an average decline of 0,6% in the month since it began trading in 1971. And the Dow Jones Industrial Average has seen an average decline of 0,7% in the month of September between 1950 and 2020.
It is curious that such weakness is repeated year after year. We could expect investors to anticipate the coming decline and position themselves to take advantage of it, for example by selling in August ahead of expected weakness in September. However, even over the past 25 years, the S&P 500 has continued its September streak, with an average decline of 0,7%. In 2021, in fact, the losses in September were especially strong, losing 4,7%, after seven consecutive months of profits.
What drives these sales?
If the historical weakness of the market in September is clear, its causes are not so clear. Some say these losses occur when managers of large investment funds return from summer vacation and get rid of assets they don't like. Logic tells us that these movements cause new selling pressure, which causes the markets to go down. Some say the desire to sell builds during the summer, when market volume is thin. And there is also another factor. When people return from summer vacation with credit card bills to pay, many look to sell some stocks to pay them off.
What can happen in September?臘♂️
What will influence stocks the most this September will be the Federal Reserve and its upcoming interest rate decision as they try to control the inflation of the country without taking down the entire economy. A bigger-than-expected rise would likely send the stock lower. A smaller rise would likely send the stock higher. Let's take a look at the 200 period moving average (yellow line). It is a useful indicator for our investment training because it helps us identify long-term trends and possible changes in direction.
The moving average also serves as support or resistance for an asset, in this case, the S&P 500. On the chart we can see that the S&P 500 (white and red candles) has risen to the yellow line of the moving average, but He has not been able to overcome it so far. In other words, the 200-day moving average appears to be acting as a resistance level for the S&P 500. Trend lines are another very useful technical tool for your investment training. It helps us analyze prices in short and long-term time horizons. We can consider a trend line one that connects at least two points on a chart and is usually expanded to see where we can find resistance and support in the future. The trend line (in red) starts from the maximum of January 2022, connects with the decreasing maximum of March 2022 and touches it again to 4.337 points on August 16. He managed to get close, but was unable to overcome this level of resistance.
Now that we have seen two useful tools for our investment training, we have seen how the 200 period moving average is acting as a resistance to beat, just as the downtrend line has been rejected from the 2022 high. In other words , the September effect will most likely still be alive this year.
How can we take advantage of this opportunity?
September is only one month of the year, and if our focus is on long-term investing, monthly market movements should not worry us. Of course, if you are worried about the possibility of the market continuing to suffer losses over the next eight weeks, we have the possibility of taking advantage of these short-term movements. For example, we could short the ETF SPDR S&P 500 (SPY) or in the Invesco QQQ ETF (QQQ).
If the S&P 500 manages to break through the 200-day moving average and the bearish trend that we have drawn above, that could tell us that the market could be ready to start an uptrend. Remember to review the advice we have given you for your investment training. You can use these indicators as a guide to establish entry and exit levels.