This is a guest post by Wayne Whaley (CTA):
Men Who Can Be Right and Sit Tight Are Uncommon.
Reminiscences of a Stock Operator
The S&P 500 has officially closed the month of September up by 3.68%. A few weeks ago I shared some statistics on the significance of a positive September: When September Flexes It’s Muscle.
To summarize my previous comments: September has a deservedly bad reputation. Since 1950 it has been the weakest month of the year, averaging a return of -0.61% with losses occurring 57% of the time.
Therefore, the market’s ability to buck this bearish seasonal trend in September should be respected and viewed as a sign of continuing strength. When September is positive, fourth quarter returns are positive 84% of the time with an an average gain of 4.84% over that time frame.
Only two of those 25 fourth quarters saw the market down more than 1%. Even “The Mother of all Crash Months” October was positive after positive Septembers 60% of the time for an average gain of 1%.
So now that we have a rare positive September, what now?
This is especially interesting since this September was the 7th consecutive positive month for the S&P 500 index. The inclination is to play contrarian and view this move as a sign of overextension. But, as Lee Corso would say, “Not so fast my friend”. The odds for an eighth positive month are 12-2.
Here is the full data for similar past instances of such “overextension”:
As you can see from the historical data, there is no mean reversion. Instead, stock prices continue their trajectory and tack on even more gains. The sweet spot is 6 months ahead, which from here would take us to February 2010, with a gain of about 8% (and 93% positive returns).
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