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Wall Street Week Ahead - Will Positive Momentum Beat the Statistics?

 

While markets are opening September at record levels, the notoriously weakest month in the financial calendar holds critical tests from employment and inflation reports to the Fed interest rate decision.

 
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Can Positive Momentum Defy September Market Curse?

Although August ended with slight declines, stocks managed to register an impressive 1.9% increase for the month as a whole. The increase was due to stronger-than-expected quarterly results, a recovery in large technology stocks and bets on expected interest rate cuts from the Fed. All of this sounds great, until you look at what usually happens in September.

The market enters September in an unusual state: the month historically considered the worst for stocks begins with indices at record levels and all technical indicators showing a positive picture. Over the past 75 years, the S&P 500 has lost an average of 0.7% in September, compared with an average gain of 0.6% in all other months. What’s more, since 1928, September has been down 55% of the time, making it the worst month on the financial calendar.

Adam Trenquist, chief technical strategist at LPL Financial, thinks this time around it could be different. “The trend is your friend in September,” he writes, “and when you factor in momentum and trend, September doesn’t look so bad.” According to Turnquist, when the S&P 500 is above its 200-day moving average at the start of September, it typically rises about 1.3%, almost twice its normal average.

Momentum and the Fear Index

Momentum plays a critical role in the month’s performance. When the S&P 500 ends a month higher, it tends to continue the following month with an average gain of 3.2%. Conversely, a down month makes the average fall 3.8%. The fact that August closed up 1.9% puts September in a statistically positive position.

However, there is a downside to the positive picture. The VIX volatility index is at its lowest levels this year, down 73% from its peak in April. At the same time, the S&P 500 is up nearly 30%. This combination of low volatility and sharp increases can be misleading.

History shows that such low levels of the fear index do not last long, especially as we enter the fall. “The VIX has historically risen in the fall, with the high of the year typically coming in late September or early October,” warns Trenquist.

September Events

The real risks come not just from historical data but from the economic realities ahead. September includes important data releases that could shake up the market: the August jobs report on September 5, revisions to previous data on September 9, and the August inflation report on September 11.

Events from the previous year illustrate the potential for significant surprises in the data. In its annual review, the Bureau of Labor Statistics found that the number of jobs created in the 12 months to March 2024 was 598,000 lower than reported during the year. Interestingly, the initial estimate for the revision was even larger - 818,000 fewer jobs.

Trump’s new policies create additional uncertainty. The tariffs he imposed earlier this month are expected to affect August inflation data due on September 11. At the same time, Trump is expected to hear the verdict in two court cases challenging his authority to impose tariffs using the International Emergency Economic Powers Act.

These developments could increase market volatility. The Fed’s interest rate decision on September 17, along with the new growth and inflation forecasts, will cap a month full of potential shocks. The question is whether the current positive momentum is strong enough to withstand these events.

The paradox of the “September effect”

The main paradox of the “September effect” is that it could self-destruct. If enough investors recognize the The phenomenon and acting accordingly, for example, selling in August to get ahead of the expected decline are actually creating the problem in August instead of September. It has happened before.

A 300-year study using British data dating back to 1693 finds no evidence at all of the existence of the “September effect.” September’s average was actually higher than other months in three out of six 50-year periods, even if the difference was not statistically significant. Most market economists are highly skeptical of the effect. They argue that if it did exist in the past, traders who are familiar with the anomaly are now acting in a way that effectively eliminates it. The market is an evolving creature that has learned to get rid of obvious weaknesses.

The theoretical background to the “September effect” ranges from the logical to the exotic. Returning from summer vacation, selling to finance tuition, closing positions towards the end of the third quarter—they all sound plausible. But is it enough to create a consistent pattern over decades?

The conclusion from the data, at least for now, is that September this year may be different from usual. The current positive momentum, supportive technical indicators, and strong fundamentals put the market in a position to challenge historical data.

September this year may become another example of current market forces being stronger than historical trends.

 
 

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Please note that the article should not be considered as investment advice or marketing, and it does not take into account the personal data and requirements of any individual. It is not a substitute for the reader's own judgment, and it should not be considered as advice or recommendation for buying or selling any securities or financial products.

 
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