The financial market tends to have some seasonality baked in. In other words, stocks and other assets tend to show some patterns in certain periods of the year. For example, in most cases, stocks tend to have some limited volumes at the beginning of summer and in the final weeks of the year.
This price action is mostly because many investors tend to stay away from the market during this time. We have looked this at the concept of selling in May and going away.
In this article, we will look at the so-called September effect and why the month is usually the worst month for stocks.
September is the worst month for stocks
Historically, September is the worst-performing months for stocks. According to Barrons, since 1928, the average return for the S&P 500 in September is a loss of 0.99%. The second worst performing months is May, which has an average loss of about 0.11%.
The chart below shows that the Nasdaq 100 index has underperformed in all September since 2018.
On the other hand, some of the best months for stocks are in April, October, and November. In April, stocks tend to rise as the tax season ends. Also, companies tend to report their quarterly results in April. These results usually provide the financial results of companies and their forward guidance.
Why does the September Effect happen
It is difficult to pinpoint why September is usually a bad month for stocks. First, September usually coincides with the end of the summer season. And it is widely known that many fund managers use the summer season to travel, meaning that they don’t typically invest.
These large investors are relatively big players in the market because of their substantial volume. Therefore, September is usually a month where they rebalance their portfolios. This, in turn could lead to more pressure in the market.
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Another possible reason why stocks tend to underperform in September is that investors are usually on the lookout for the upcoming earnings season that starts in October. The earnings season is usually an important month because it is where companies provide more guidance of their earnings.
» Related: Trade Earnings like a Pro!
Other popular seasons in stocks
Ideally, the concept of seasonality is relatively broad in the market. Indeed, some sectors tend to perform well or underperform in certain periods. For example, retail companies tend to perform well in the final half of the year because of the top shopping events like the Black Friday and Christmas shopping. Similarly, companies dealing with natural gas experience some volatility ahead of winter.
Seasonality can also be in form of days. For example, in most cases, stocks tend to have some key movements on Mondays as the market reopens after the weekend.
Meanwhile, there is the concept of selling in May and going away. This simply means that stocks tend to underperform the market in May.
How to trade in September
Therefore, if stocks typically underperform in May, how should you trade during the month? Ideally, the simple answer should be to just short stocks in the end of August and see how your portfolio will perform.
However, in reality, this would be the wrong strategy to trade in September. Instead, we recommend that you do the following:
- Identify momentum stocks – While September is a bad month, seek to identify stocks that are having some momentum. You can do this by looking at the most active stocks or those that are hitting their 52-week highs and lows.
- Focus on stocks and not indices – Next, you should focus on stocks and not indices in particular. Even in a difficult month, some stocks will tend to do well.
- Don’t change your strategy – If you have a strategy that works in most months, you should not change it simply because September tends to lag. Indeed, historically, some traders tend to perform well in September.
Historically, September tends to be a difficult month for stocks. However, most traders find it being a good month to make money. In this article, we have looked at some of the top reasons why September lags and some of the top strategies to use.
External Useful Resources
- Should I be worried about the September Effect? – Chase.com