This is the riskiest time for stock market bulls as seasonal weakness spans from mid-September until late October.
Bearish seasonality tends to start the week after triple witching (which was Sept. 15). Triple witching is when stock options, index options and futures all expire on the same day.
This happens once a quarter and, aside for the potential of more volatility, it’s not a must-know event for investors.
However, it’s worth knowing that stocks have declined during the week after September triple witching in eight of the past 10 years. Even going back 25 years, the week after triple witching is statistically in the red 80% of the time.
Although stocks haven’t budged yet, the conditions for more sustainable gains are less than promising.
The Dow Jones Industrial Average
is the most overbought (based on RSI-2, a short-term measure of relative strength) since August and February. The blue bars highlight the most overbought DJIA conditions since December 2016. Each overbought rally resulted in a pullback.
The next trend line resistance, and chance for such a pullback, is around 22,450 points.
Momentum vs. risk
Strong upside momentum has been overriding bearish forces, but the weight of evidence (investors’ sentiment, technicals, breadth, liquidity, Elliott Wave Theory, seasonalities and cycles), suggests a temporary pullback is getting close.
Once complete, this pullback should lead to a year-end rally.
In terms of seasonality, there is a bearish window from mid- until late September and strong bullishness starting in late October.
If sellers can create “escape velocity” to the down side, the correction could last for about six weeks (until late October). The month of October is essentially neutral and could go either way.
If sellers can’t drive stocks below support, bullish year-end seasonality may start earlier and result in a slow and painful grind higher.
Based on seasonality, stocks are on thin ice. Thin ice doesn’t always break, but seasonal risk is elevated.
A more detailed multi-indicator outlook for the SP 500
is available here: SP 500 update: top or not?
Simon Maierhofer is the founder of iSPYETF and publisher of the Profit Radar Report. He has appeared on CNBC and FOX News, and has been published in the Wall Street Journal, Barron’s, Forbes, Investors Business Daily and USA Today.