The Biggest Crashes in History Happened in September and October

In the last installment of Seasonal Insights we wrote about the media sector – an industry that typically tends to perform very poorly in the month of August. Upon receiving positive feedback, we decided to build on this topic. This week we are are discussing several international markets that tend to be weak during September and will look at what drives this recurring pattern.

 

Mark Twain, a renowned specialist in how not to get rich, opines on dangerous months to invest in the stock market. We should mention that he didn’t have access to the Seasonax app. [PT]

 

When you ask investors what they believe to be the worst month of the year for the stock market, most would probably reply that it is October. Most of our readers probably know about Black Friday (1929) and Black Monday (1987). In both cases stock market panics in the US led to global contagion and worldwide market crises.

These two events were the most dramatic declines in stock prices in the 20th  century – and both happened in October. The conclusion that October is a tough month to invest seems logical. However, the data indicate that  finding profitable investment opportunities is even more difficult in September.

According to Lim (2017), the S&P 500 has lost an average of 0.7% during September since World War II. The worst economic downturn since the Great Depression of the 1930s was triggered by the 2008 financial crisis, and fittingly, the Lehman Brothers bankruptcy – which is routinely blamed for bringing the crisis to a head – was announced on September 15.

 

The market crash of 2008 spawned a number of memorable magazine covers. This one apparently depicts the moment when the eyes of Wall Street denizens are beginning to bleed upon spotting Nancy Pelosi waving a recent chart of the DJIA. [PT]

 

Reasons for Market Weakness in September

Why are the markets typically struggling in September? There is no definitive  answer, but we believe there is more than just one reason. Firstly, like most people in the Western hemisphere, investors tend to go on vacation in the summer. August is a traditionally the month in which many financial markets enter their summer break.

Since most investors simply tend to leave their positions unchanged during this time, trading volumes decline. Once they get back to work, the first thing they tend to do is exit positions they were planning on exiting anyway (Gallant, 2018). Since this behavior is widespread, it often triggers price declines.

Another potential reason is that for many mutual funds the fiscal year ends at the end of September. They typically sell losing positions before the end of the year in order to claim tax losses and to prettify their portfolios, which generates additional selling pressure.

 

September syndrome: the graph from Wall Street breaks through in rural China… [PT]

 

Analysis of International Indexes Validates the Theory

We have analyzed this phenomenon with the Seasonax web app, in order to find out whether hard statistical evidence confirms these ideas. To this end we have analyzed the biggest international stock markets. Below we show a selection of three indexes exhibiting this pattern.

The first index we have selected is the NASDAQ 100 (NDX). The NDX constituents are the 100 largest non-financial companies listed on the NASDAQ. The financial crisis of 2008 hit the index severely, but based on the data of the past 20 years, there is clear evidence that a recurring pattern of weakness in the month of September exists.

 

The NDX posted massive losses in 2008 – but apart from that, a general tendency of weakness in September is definitely evident over the past two decades, with the index declining in 14 of 20 cases (this compares to the fact that overall, the stock market is rising 67% of the time due to monetary inflation). Moreover, the average annualized return of -52.27% is truly abysmal – it is clearly typically the worst period of the year. [PT]

 

The second index we examined is the FTSE All-Share Index, a capitalization-weighted index that comprises more than 600 companies listed on the London Stock Exchange. The index is an aggregation of the FTSE 100, FTSE 250 and FTSE SmallCap indexes. Although there were a few profitable years (2007 and 2009 in particular), the general trend of the last 20 years is clear – the market is weak in September.

 

The FTSE All-Share Index – another example of recurring weakness in September. Once again losses were recorded in 14 of 20 cases, although the average annualized loss was smaller than in the NDX, as the latter is traditionally more volatile. [PT]

 

The third index we have examined is the Euro Stoxx 50. Owned by Deutsche Boerse Group, it represents the largest super-sector leaders in the euro zone in terms of free-float market capitalization. Similar to the examples above, we can observe a clear bearish pattern in September. The chart shows clearly that September and October are indeed the by far worst performing months.

 

The Euro Stoxx 50 index exhibits the same pattern of weakness in the September – October time frame. While in this case declines were “only” recorded in 13 of the past 20 years, the average annualized loss of almost 50% is stunningly large for such a broadly diversified index of blue chips. [PT]

 

Conclusion

Our analysis shows that there is clear statistical evidence for recurring bearish patterns during September in the largest stock markets around the world. Whether this is mainly due to investors fearing another big crash in October and selling preemptively, a widespread post-holiday behavioral pattern of exiting stale positions, or a result of window-dressing and tax-loss selling of losing positions at the end of the mutual fund fiscal year cannot be determined with certainty.

Nevertheless, we consider it important to not just analyze these phenomena statistically but to go beyond the data and try to understand what actually drives seasonal patterns. We would be very happy to hear from our readers if they have any further ideas about the traditional stock market slump in September. Simply drop us a note at support@seasonax.com!

What is the takeaway from this week’s Seasonal Insights? Obviously, one has to act with great caution during the month of September and also keep in mind that October is usually not very friendly to investors either. However, don’t forget that the markets tend to pick up later in the fall, as the year-end rally traditionally begins in late October.

You can use the Seasonax app to find investment opportunities based on cyclical patterns and thoroughly analyze them before making investment decisions. As always, there are never any guarantees in the markets, but you can certainly let the probabilities work in your favor!

 

Dimitri Speck specializes in pattern recognition and trading systems development. He is the founder of Seasonax, the company which created the Seasonax app for the Bloomberg and Thomson-Reuters systems. He also publishes the website www.SeasonalCharts.com, which features selected seasonal charts for interested investors free of charge. In his book The Gold Cartel (published by Palgrave Macmillan), Dimitri provides a unique perspective on the history of gold price manipulation, government intervention in markets and the vast credit excesses of recent decades. His ground-breaking work on intraday patterns in gold prices was inter alia used by financial supervisors to gather evidence on the manipulation of the now defunct gold and silver fix in London. His Stay-C commodities trading strategy won several awards in Europe; it was the best-performing quantitative commodities fund ever listed on a German exchange.

For in-depth information on the Seasonax app click here. Furthermore, here is a complementary page on the web-based Seasonax app. (note: subscriptions through Acting Man qualify for special discounts – for both the Bloomberg/Reuters and the web-based versions of the app! Details are available on request – simply write a note to info@acting-man.com).

 

Charts  by Seasonax

 

Chart & image captions and editing by PT

 

 

 

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