Beware of Most Negative Seasonals of the Year

For the past three weeks I have written about the need for a short-term pullback in stocks. I have been and remain positive on the intermediate and long-term view for the stock market. Remember, pullbacks can come by stocks going sideways for a period of time or by price declining enough to entice buyers back in. In the major indices we saw a split pullback with the Dow, S&P 500 and NASDAQ 100 going sideways while the S&P 400 and Russell 2000 declines 2.65% – 3.70%. The former indices are now sitting at fresh highs and the pullback clearly ended this past Monday.

Let me be clear; I remain positive over the intermediate and long-term. However, before you assume that stocks are going to rocket higher from here, which they may, there are still a few hurdles to overcome in the seasonality department. This week, the markets bullishly digested the Fed meeting, Janet Yellen’s news conference and the Scottish vote to leave the United Kingdom.
Alibaba came public on Friday with an article devoted below. Like previous very high profile public offerings with stocks at or close to new highs, the bears came out of the woodwork last week, predicting the perfect end of the bull market on “Baba Day”. While I completely disagree with that assessment, the stock market has entered the most negative seasonal period of the year which sounds a lot worse than it actually is.

From Friday’s up opening through September 30, no other calendar period is as negative historically than right now. But before you jump into that super bear camp, realize than seasonal trends or seasonality are nothing more than a headwind or tailwind. Markets do not reverse course simply because of seasonality. It just helps add a little energy.

Besides the specific calendar challenges, there is also an added negative that follows the September expiration of options and futures which occurred on Friday. That trend shows a headwind most of this week, but particularly earlier in the week. Finally, with stocks rallying into the Fed statement as well as after it, there is another little trend I call the “Fed Hangover” which indicates some very short-term weakness this week.

How is all this research best used? From my seat since I remain positive over the intermediate and long-term, I think it will be very instructive to see how the stock market performs through month end. If stocks can hang in and only see another mild pullback, worst case, that would reinforce the bullish case and set the stage for a run to Dow 18,000 in the fourth quarter.

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Paul Schatz, President, Heritage Capital
Paul Schatz, President, Heritage Capital
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