Could Stocks Suffer a September Shock?
Business + Economy

Could Stocks Suffer a September Shock?

istockphoto / TFT

After an easy rise through the spring and early summer, July and August featured some excitement, at least for those busying themselves with the vagaries of the stock market and the news headlines instead of soaking up the summer sun on a beach somewhere.

After the worst market pullback since January, driven once again on fears over the situation in Ukraine, the S&P 500 bounced back quickly from its 4.4 percent peak-to-trough decline to storm over the 2,000 level for the first time ever. But after crossing the milestone last week, it's as if the music stopped. Stocks sort of just hit a wall. As the calendar rolls into September, investors are wondering: What's next?

Related: How Europe’s Economic Slump Could Doom Ukraine

With the Dow Jones Industrial Average testing down near the 17,000 level on Thursday and Friday one gets the feeling that the first week of September is going to feature an epic battle between the bulls and the bears over control of these major thresholds: 2,000 on the S&P 500 and 17,000 for the Dow.

Seasonality won't help the bulls much: September historically is the worst month of the year for stocks, with an average loss of 0.5 percent for the S&P 500 since 1950.

Moreover, the month has seen some large scale pullbacks, including a 7.2 percent drop in 2011, a 9.1 percent drop in 2008, an 11 percent drop in 2002 and an 8.2 percent drop in 2001. September was a down month for four years in a row through 2002.

Related: Why September Is the Most Volatile Month for Stocks

October is better, with an average gain of 0.8 percent since 1950 despite being the epicenter of major market crashes in 2008 (down nearly 17 percent) and 1987 (down nearly 22 percent). The heebie-jeebies surrounding Halloween, I guess.

As the calendar moves into the holiday season, things improve further. November features an average gain of 1.5 percent while December features an average gain of 1.7 percent. December has been particularly strong lately, with gains for six consecutive years averaging 2.2 percent. Thank you, Santa Claus.

With this in mind, watch for some bumps in the road over the next couple of months as investors chew through the looming end of the Federal Reserve's QE3 bond-buying stimulus as well as the still fluid situation in Ukraine.

Related: How a 15-Year-Old Investor Beat the Market

Indeed, there is some activity in safe haven areas of the market, with utility and telecom stocks leading the way late last week — not the sector groups that instill confidence in the quality of the S&P 500's push to record highs. Instead, it suggests that investors were shunning more cyclical, economically sensitive areas.

^SPX Chart

^SPX data by YCharts

Consider that the two core cyclical areas of the market — industrials and transportation stocks — drifted lower for the last two weeks of August. That's a big warning sign. You can see the disconnect between industrials and the S&P 500 in the chart above.

While the lack of participation by key cyclical groups is no guarantee of a market selloff, given the poor seasonality of September and October, I've recommended clients book profits, raise some cash and plan on thinking defensively until after Election Day in November.

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