Are you Ready for the September Selloff?

Chad Karnes

The markets have been practically dead this week leading up to the long holiday weekend.

New all time S&P 500 highs were once again set Monday, August 25, but volume was dismal as the futures contracts hit their yearly lows and the cash market was the second slowest day all year (only behind the shortened July 3rd holiday).

WATCH: Why the Euro has made a Major Top

Historically making new all time highs in August has not been a good thing as three separate facts combine to suggest September returns will be muted from here as Wall Street comes back to work from their August holidays.

Despite Misconceptions, Volume does Matter

Check out the chart below which shows the S&P (^GSPC), its volume, as well as a popular momentum indicator.

The chart shows that Monday was the 2nd lowest volume of the year, only behind the shortened July 3 holiday.  This past Monday, however, was a full trading day, so from an analysis standpoint it could easily be considered the lowest volume day of the year.

This is occurring while momentum (PDP) is weaker than at the prior June and July tops, a classical technical sign of weakness.

S&P Volume
S&P Volume

Also outlined, the previous low volume period, surrounding the July 4 holiday, marked the previous market top.  Are we again seeing signs of the next market top (SPXS) surrounding the upcoming Labor Day holiday and concurrent low volume?

Volume does matter, and history backs this statement up.

When stocks (SCHB) hit new highs on below-average volume, they tend to underperform much more than when they hit new highs on above-average volume.

There have been 446 times since 1940 when the market made new 52 week highs on below-average volume and 1,379 days it did so along with above-average volume.  One month later, the market (VTI)  was on average down 0.1% after low volume accompanied new 52 week highs compared to being up 0.6% when an above-average volume breakout occurred.

This suggests September will be a flat to down month since new highs in August were made on below-average volume.  Historically the following month returned -0.1%.

A Great August Typically Means a Bad September

The S&P (SPY) is up 3.5% with just one day left in August.

If it closes up over 3% for the month, September has followed with positive returns only 36% of the time.  This compares to an average month being up 60% of the time.

If August also closed at a new one year high, then September returned positive results just one time of the 12 this has occurred since 1928.  On such occasions September on average fell by -2.6%.

With only one day left in August, it looks like the month will end up over 3% and at new monthly 52 week highs.

As such, history suggests September will be a rough month.

Even if August ends up less than 3%, when it is up over 1% alongside new 52 week highs, September has averaged down -1.6%, with only 3 out of 19 instances posting positive results.

Finally, of the 12 calendar months, September is the weakest of them all, down on average 0.6% since 1950 and another reason to be skeptical September will be a positive month.

We never propose trading on statistics alone and suggest waiting for price to first tell of such movements, but given the below average volume and historical significance of a weak September following a strong August, a short term price breakdown is certainly something to be expected.

In the Technical Forecast provided to our subscribers I outline the key price levels I am following that will help warn when this decline is likely beginning.  It may have just started, if so, how far will it run?

The ETFguide Profit Strategy Newsletter provides the technical, statistical, sentiment, and fundamental data along with the trade setups to help investors take advantage of the market’s movements.  We recently exited a 4% two month trade in the S&P. Don’t miss our next S&P entry point.

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