Historically the month of September is the weakest month of the year for the stock market. Since 1950 the DJIA has averaged a decline of 0.8%, and the S&P 500 has declined 0.5% during the month. Seasonality, however, is a tendency and not a certainty. While the S&P 500 has, on average, had a loss, the median is positive, which means it has had a gain more than half of the time.
The primary issue that we have to watch for with seasonality is that it can be a good excuse for some corrective action in the right environment. The market really doesn't need a good excuse for some profit-taking when it's the month of September as everyone already always knows it is a weak time of the year.
The most notable characteristic of the market as we enter the new month is the rotational action that has occurred under the surface. Small-caps, growth stocks, speculative names, and a variety of sectors that were in a bear market after topping out in February finally found support and have been putting in a strong bottom. Speculative trading has picked up nicely, and many individual traders that struggled for several months are breathing a sigh of relief as they recover from a tough run.
For the most part, the business media and most pundits have been oblivious to this significant shift in the market action. As always, they are focused on the indices and the same old big-cap names. The focus is on how extended the indices are. They ignored the fact that the indices ran up on terrible breadth, and they are now ignoring the fact that breadth is improving and many elements of the market are not even close to being extended.
The big issue in September will continue to be this tension between the indices and the action in individual stocks. On Tuesday, we saw a pretty good example of how there can be good trading in individual stocks while the indices struggle and don't do much. That is likely to be a theme that will continue for a while, and it will require us to be very vigilant.
My game plan is to stay focused on the strong speculative action and to look for opportunities to add to my favorite names during volatility. I expect there to be a lot of chop, but I also expect to see a good supply of daily movers of 10% or more.
We have a positive start this morning as the market always likes the automatic inflows that tend to occur on the first day of a new month.