Semiconductor stocks, which tend to lead the U.S. stock market both higher and lower, have recently made an abrupt and unexpected upward reversal which, if it holds, is likely to lead the broad market to new all time highs by year end. If this bullish reversal fails to follow through over the next week or so, however, it will warn of an emerging market correction that could extend into October.
Buckle up. The current combination of geopolitics and seasonality that includes two hurricanes, the ongoing nuclear threat from North Korea, Special Counsel Robert Mueller’s investigation into the Trump Campaign’s involvement with Russia, and the US stock market’s seasonal tendency to be weak from now through mid October, collectively set the stage for a potentially treacherous autumn for investors.
Regarding seasonality, many financial asset prices have a statistical tendency to rise and fall at certain times of the year. Crude oil prices are historically their weakest during the 4th Quarter, gold prices seasonally peak for the year during August and September, and global equity prices typically bottom in September. Chart 2 below shows that September is by far the seasonally weakest month of the year in the SP 500, on average since 1957 closing 0.72% lower for the month. Moreover, since 1957, the SP 500 has posted a negative monthly close 57% of the time, its highest incidence of a negative close for any month during this period.
Copyright 2017 Asbury Research LLC
So, this year, weather and geopolitics are playing right into the hands of an already tough period on the calendar for U.S. stocks. There may be a light at the end of the tunnel, though.
In my August 2oth article for Forbes, I pointed out that a recent breakdown from months of sideways indecision in the SPDR SP Semiconductor ETF (XSD), a surrogate for the semiconductor sector, targeted an additional 8% decline. I am always particularly interested in what semiconductors are doing because of their historical tendency to lead the U.S. broad market both higher and lower.
Since then, however, the trajectory of the semis, and of the market itself, has made an abrupt 180 degree about face, amazingly on Tuesday August 29th following the news that North Korea fired a missile over the northern Japanese island of Hokkaido, the most brazen provocation of North Korean leader Kim Jong Un’s five-year-long rule. As one would expect, when this story initially broke after regular trading hours on August 28th, SP 500 futures quickly collapsed by as much as 20.00 points in overnight trading. By the next day, however, the event was completely discounted by the marketplace as the US broad market index actually closed slightly higher on August 29th.