Mid-Month Update: Seasonal Weak Spot After September Triple Witching

By: Jeffrey A. Hirsch

September 15, 2016

So I guess that’s the end of our low volatility period. As we pointed out last week the end of lengthy streaks of low volatility can be damaging to market performance. After not having an S&P 500 daily move greater than +/- 1% for 43 trading days since July 8th, we have had 4 in the last 5 days.

This recent volatility is highlighted in the yellow oval in the chart below of the Three Peaks and a Domed House Top pattern (3PDH) we have been tracking since June, which was re-plotted a month later in July. Previous clusters of this sort of volatility on the chart are associated with corrections.

I am not convinced we will get all the way back to the 3PDH Separating Decline low at points 10-14 at this juncture, but the Brexit lows could be in play over the next several weeks.

The perennial trouble spot of late September just after Triple Witching and early October is converging with this ominous chart pattern. Election campaign machinations are ramping up now with less than two months left to Election Day. The first debate is in less than two weeks. Polls have narrowed to a statistical dead heat and the third party candidates are gaining some traction.

Typical September

September is still tracking the usual seasonal pattern somewhat closely. The month started out on the upside. Then we succumbed to some back-to-school weakness. Currently the market is attempting to mount the usual mid-month rally. (Today’s market action is not in the September 2016 chart below.) Recent volatility has clearly rendered September 2016 performance below average. As of todays close the S&P 500 is off -1.1% for the month of September to date.

Election-year Septembers tend to be a bit more volatile and that’s precisely what we are getting this year. After the convention bounces and the summer break the rhetoric heats up in September just as fund managers and institutions begin to jockey for positon and readjust portfolios for yearend and the next administration. Throw in a few geopolitical events with North Korea, Russia and the Middle East and the market gets shaky.

Like most years, election years are prone to a correction in the two months leading up to Election Day, but this usually sets up a nice post-election and yearend rally. Continued risk avoidance is in order for the time being as our cautious stance continues to pay off.