September Opens Typically Weak and Closes Weaker Although the month used to open strong, S&P 500 has declined nine times in the last fifteen years on the first trading day. With fund managers tending to sell underperforming positions ahead of the end of the third quarter there have been some nasty selloffs near month-end over the years. Recent substantial declines occurred following the terrorist attacks in 2001 (DJIA: –11.1%), 2002 (DJIA –12.4%), the collapse of Lehman Brothers in 2008 (DJIA: –6.0%), U.S. debt ceiling debacle in 2011 (DJIA –6.0%) and in 2022 (DJIA –8.8%). Do not anticipate any major selloff and expect new highs around yearend. But expect some sort of surprise to send stocks into another mild correction before the Q4 rally ensues. Nobody wants to talk about it or hear about it, but inflation appears to be done cooling. Further hints at higher inflation will likely heat up the “higher-for-longer” chatter and weigh on stocks. Concerned that we are poised for a September surprise in the financial sector. Would not be shocked if one of the rating agencies comes and announces a host of bank downgrades, perhaps starting at the top with a big bank. They did warn us back in March during the banking scare and most recently with the Fitch downgrade of the US credit rating. Either way, expect any weakness to be temporary and for the market to continue to track the seasonal and 4-year cycle patterns illustrated in these charts as it has all year and since 2021.
September Quarterly Options Expiration Treacherous, Week After Awful Since the S&P index futures began trading on April 21, 1982, stock options, index options as well as index futures all expire at the same time four times each year. Some call it Quadruple Witching or Quad Witch due to single-stock and ETF futures however, their impact on the market appears subdued to us and we continue to prefer using Triple Witching. September’s quarterly option expiration week has been up 56.1% of the time for S&P 500 since 1982. DJIA and NASDAQ have slightly weaker track records with gains 51.2% of the time and 53.7% of the time respectively. However, the week has suffered several sizable losses. The worst loss followed the September 11 terrorist attacks in 2001. In the last twenty years, S&P 500 and NASDAQ are tied for best record during September’s quarterly option expiration week, up thirteen times, but NASDAQ has been down the last five straight. Friday had been firm with all three indices advancing every year 2004 to 2011, but S&P 500 has been down ten of the last eleven since. S&P 500 Down 26 of 33 Week After September Quarterly Options Expiration, Average Loss 1.01% The week after September options expiration week, has a dreadful history of declines most notably since 1990. The week after September quarterly options expiration week has been a nearly constant source of pain with only a few meaningful exceptions over the past 33 years. Substantial and across the board gains have occurred just four times: 1998, 2001, 2010 and 2016 while many more weeks were hit with sizable losses. Last year DJIA and S&P 500 declined over 4% while NASDAQ fell 5.07%. Full stats are the sea-of-red in the tables here. Average losses since 1990 are even worse; DJIA –1.07%, S&P 500 –1.01%, NASDAQ –0.98%. End-of-Q3 portfolio restructuring is the most likely explanation for this trend as managers trim summer holdings and position for the fourth quarter.
High Rates Dampen Expansion Expectations Tue, Sep 12, 2023 Early this morning, the NFIB published their latest read on small business sentiment. The headline index fell to 91.3, 0.2 points lower than expectations. Sentiment continues to sit near some of the lowest levels of the past decade, albeit off of the worst post-pandemic period when it had reached a low of 89.0 this past spring. With the decline in the headline index, it is just shy of the bottom decile of its historical range reinforcing the point that small businesses are historically pessimistic. Breadth in this month's report was fairly mixed with five inputs to the composite falling month over month, three rising, and two going unchanged. As for the other indices, five rose and the remaining three fell. Employment metrics are some of the areas that have remained somewhat elevated versus history. For example, while many categories are in their bottom deciles of historical readings, job openings hard to fill, compensation, and compensation plans all rank in the 93rd percentile or better. Even plans to increase to increase employment have held up in the top quartile of its historical range. Although current readings would indicate a healthy labor market, conditions have not necessarily improved. As shown below, most of these categories have been trending lower for some time meaning small business labor markets have cooled. However, compensation plans spiked by 5 points in August which is tied for the fifth largest month over month jump on record. Expectations for changes to sales remain in negative territory meaning that on net more small businesses expect their sales to fall than rise. In August, that reading worsened, and at -14, the index is in the bottom 3% of all readings on record. As with the headline number, although that is a disappointing result, it is off of recent lows. Conversely, actual sales changes are hitting more new lows with the weakest readings since the spring of 2020 and late 2012 before that. The share of respondents reporting now as a good time to expand their business is another category where readings are at the low end of their historical range without any improvement or further deterioration in August. The NFIB provides a breakdown into the reasons responding firms report their expansion outlook. As shown below, the vast majority report poor economic conditions as the reason which checks out when compared to a very low reading on expectations for the economy to improve. Behind economic conditions, interest rates are the next most quoted reason. That lends to some evidence that the Fed's rate hikes are working as intended.
Sell Rosh Hashanah Buy Yom Kippur Sets Up Sell Rosh Hashanah, Buy Yom Kippur is aligning quite well this year with late September seasonal weakness and the notoriously treacherous week after quarterly options expiration, AKA Triple Witching. It’s a few days before FOMC with a market jittery on hotter inflation data. Rosh Hashanah lands on Saturday 9/16 this year so our stats us the close the day before. This is right at the mid-month peak of the typical September pattern. Yom Kippur falls on 9/25 which is the 16th trading day of the month, right around the seasonal monthly low point. The thesis is that folks sell positions on Rosh Hashanah the first of the Days of Awe to rid themselves of financial commitments and then return to the market after Yom Kippur, the Day of Atonement. It is no coincidence that this coincides with the seasonal September/October weakness. The market has been tracking the 4-year cycle and seasonal trends to a T this year and the past 3. So this should make a great entry for the Q4 pre-election year rally.
Large Decline in Homebuilder Sentiment Mon, Sep 18, 2023 For a second month in a row, homebuilder sentiment slumped with the NAHB's Housing Market Index falling from its recent high of 56 in June down to 45 in August. That is the lowest reading since April and the first back-to-back declines since last December. As shown below, double-digit drops in two month spans are far from unprecedented, but the most recent one is in the bottom 2% of all two-month moves since the start of the survey in 1985. The declines in homebuilder sentiment were observed across the country with the indices of each of the four regions of the country falling. The charts are largely similar with each having come off of recent highs well below the prior peaks but still well off the lows put in place late last year. As homebuilder sentiment has peaked, so too have homebuilder stocks. This group was a big winner in the first half of the year, but so far in Q3, the iShares Home Construction ETF (ITB) has made a series of lower highs and lower lows. In the process, it has fallen back below its 50-DMA and continues to trade below that level near its summer lows. Again, relative to the broader market, ITB was a consistent winner throughout much of 2022 and the first half of 2023. But with weaker performance over the past few months, that outperformance relative to the broader market (indicated by the upward trending relative strength line below) has been put to the test.
Another Powell Fed Day Sees Stocks Tank Into the Close Wed, Sep 20, 2023 In Monday's Chart of the Day, we looked at how the stock market typically performs on Fed Days. Below is one of the charts highlighted showing the average intraday path that the S&P 500 has taken on Fed Days over the past year (8 Fed Days). As you can see, investors really seem to dislike what Chair Powell has to say, as the market has trended straight down in the final hour of trading once his press conferences come to an end. Today's action was no different. It's actually pretty incredible how closely today's action tracked the normal Powell Fed-Day pattern. Take a look at the chart below. The red line shows the S&P 500's path today, while the blue line shows the average path that the S&P took over the prior eight Fed Days. Maybe Powell can change things up next time (unless this is the action he wants to see).
Sentiment Drops Ahead of the Fed Thu, Sep 21, 2023 The latest weekly sentiment surveys would have missed any reaction to the FOMC yesterday due to timing of data collection. However, leading up to equities' drop in reaction to a hawkish Fed, sentiment was already headed in a pessimistic direction. As shown below, the American Association of Individual Investors weekly sentiment survey saw bullish sentiment drop for a second week in a row last week. At 31.3% bullish, sentiment is down to the lowest level since June. Bearish sentiment rose from 29.2% up to 34.6%. That is only the highest reading in a month given neutral sentiment picked up a larger share of losses to bullish sentiment the previous week. While the increase in respondents reporting as bearish has been somewhat tame, the inverse moves this week have resulted in the bull-bear spread dipping back into negative territory. That means there are currently more investors reporting as bearish than bullish. Below, we take a rolling average of the past year's readings in bullish and bearish sentiment. By this measure, bears again hold the upper hand having averaged 38.0% in the past year whereas bulls have averaged 30.4%. In the case of bullish sentiment, that remains a historically low reading as the average has generally trended lower over the past two decades while the reverse is true of bearish sentiment. That being said, there has been some reversion over the past few months with bearish sentiment falling and bullish sentiment rising towards more historically normal readings. In other words, over time, sentiment has taken a structurally higher bearish tilt, and 2022 saw that nearly reach a pinnacle. This year, though, has seen somewhat more normal but still elevated sentiment.
