Welcome to September – perhaps the most treacherous month of the year for the stock market.
Traders need only look back at the action during the previous three Septembers to understand why they should be cautious this month.
In the pandemic-plagued year of 2020, the S&P 500 fell 10% in September. It fell 5% in 2021. And, last year the index fell 10% again.
Of course, a lot of folks might look at the action we saw earlier in August and conclude that was enough selling pressure to lessen any potential decline this month.
After all, it was just two weeks ago that the McClellan Oscillators for the NYSE (NYMO) and NASDAQ (NAMO) stretched towards their most oversold levels of the year.
That’s wishful thinking.
As it turns out, technical conditions often get quite oversold in August. Then, we get the inevitable “snap-back” rally.
But, that rally only sets the stage for a more significant decline in September.
Let me show you what I mean…
In each of the past three years, the NYMO hit extremely oversold levels in August. It then snapped back to neutral before declining again in September. In two of the past three years, the NYMO got even more oversold in September than it was in August.
Here’s a chart of the NAMO showing the exact same thing…
Over the past two weeks, the S&P 500 has put on a blistering rally – gaining 4% and nearly erasing the entire early August decline.
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That’s good news for anyone who bought stocks two weeks ago in anticipation of an oversold bounce.
Now though… it’s September. Technical conditions are closer to overbought than to oversold.
And if history is any sort of a guide, it’s a bad idea to be chasing stocks higher after the big August rebound.
Traders should use the recent strength as a chance to lighten up on long positions, and maybe add some short exposure. We can get back to buying stocks in a few weeks.
Best regards and good trading,
Jeff Clark
READER MAILBAG
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