What to Expect from Key Stock Indices in the Second Half of September

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September is considered to be one of the most volatile months for the key stock indices. There are many reasons, including volume and trading activity going back to normal after summer. If you look back, you will find that some of the biggest crashes in the key stock indices we have seen were in this period as well. With this knowledge, one may wonder what investors should expect going forward this month. Are the key stock indices headed lower, or are we going to see a move to the upside? 

Using the S&P 500 as the benchmark for key stock indices in the U.S. and looking at the monthly data since 1970, the average return for the month of September is a loss of 0.59%. The September with the greatest loss on the S&P 500 was in 1974, when the index declined 11.93%. The biggest gain in September was in 2010, when the S&P 500 increased by 8.71%. (Source: “Historical Price Data,” StockCharts.com, last accessed September 11, 2013.)

From 1970 to 2012, the S&P 500 has provided a negative return in 22 of those 43 years. The last September with a negative return was in 2011, when the index declined 7.19%. 

What has been mentioned so far is mainly based on the price action, but investors really need to keep in mind that the returns can fluctuate and be completely different. They have to look at more than just one factor to determine where the key stock indices are headed next. 

When it comes to earnings, one of the main drivers of key stock indices, things are looking a little shaky. 

Consider this: for the third quarter’s corporate earnings, 85 S&P 500 companies have issued a negative outlook about their corporate earnings, while only 19 have issued a positive outlook. The current percentage of S&P 500 companies providing a negative outlook is well above its five-year average of 62%, sitting at 82%. (Source: “S&P 500 Energy sector earnings growth for Q3: A tale of two oil companies,” FactSet, September 6, 2013.) 

Considering the robust performance of key stock indices since the beginning of the year and economic conditions remaining somewhat dismal, I am a little skeptical about seeing a significant rise; I potentially even see a pullback. 

I don’t know when the markets will turn or make a top, but what I do know is that things can turn quickly. The evidence is building for some sort of decline in key stock indices. As I have mentioned before, the “taper tantrum” continues to create swings, debt limits debates, and so on and so forth. 

Investors who are in the markets for the long term should practice a significant amount of caution, as jumping to a conclusion without confirmation can affect the portfolio outright. Profits can turn into losses quickly, and giving away profits already made is the last thing long-term investors should do. 

Investors may want to place stops on the positions that are underperforming, in case there’s a move against them. If they have cash on hand, investors should keep in mind that they don’t have to focus on the key stock indices locally; they can actually look for opportunities globally. 

~ by Mohammad Zulfiqar, BA

This article was originally published at Daily Gains Letter 

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