September Delivers Seasonal Weakness Setting Up October Buy
By: Jeffrey A. Hirsch & Christopher Mistal
September 30, 2021
As S&P 500 and NASDAQ log their worst months since March 2020 and we head into October, it is the perfect time to prepare for our Best Months Seasonal MACD Buy Signal and yearend. October is the last month of the “Worst Months, and the first month of the much more bullish seasonal Q4 period – but has the notorious reputation for volatility and market selloffs. Our Best Months Seasonal MACD Buy Signal can trigger anytime on or after October 1. (See the accompanying MACD Update below for the particulars on that signal.)
The market did sell off around the 5% or so in September we projected last month. We do not expect a major correction in October, but another pullback near the September lows or lower in the 5% range from here is quite possible. That would be in the vicinity of the elusive 10% correction from the recent August/September highs. DJIA, S&P 500 and NASDAQ took out the September 21 closing lows at today’s close. Everyone is still buzzing about September/October seasonal weakness and “Octoberphobia” has been known to become a self-fulfilling prophecy. 
Many of the same geopolitical, political, fundamental and technical headwinds we highlighted in the September and October Outlooks remain present. Congress passed the funding bill to avert a government shutdown just before the market closed today ahead of the September 30 midnight deadline. The biggest risk to the market remains the Fed. An uptick in taper talk or chatter about the Fed raising rates ahead of schedule could trigger another selloff.
But, any meaningful decline that occurs in October is most likely to be an excellent buying opportunity and a near perfect set up for our Seasonal MACD Buy Signal. Since our MACD Seasonal Sell Signals on April 22 for DJIA and S&P 500 and July 14 for NASDAQ, DJIA is now just 0.1% above that level, S&P 500 is 4.2% above and NASDAQ is -1.3% below it. Seasonality is alive and well. So we stick with system. 
Sticking with the Seasonal Switching Strategy
Over the long-term, since 1950, our Best Months Switching Strategy with MACD timing has outperformed the major indexes (pages 54 and 60 of 2021 Almanac). Throughout those 71 years for DJIA and S&P 500 and 50 years for NASDAQ there were periods where the strategy outperformed and periods where it underperformed. The roaring bull market of the nineties was one period were our Switching Strategy lagged as the market generally roared higher all year long. But when that period came to an end, the Switching Strategy reclaimed lost ground as DJIA suffered “Worst Months” declines in seven out of eight years from 1998 to 2005.
Shortly thereafter the credit and housing market bubbles burst triggering the financial crisis of 2008-09 along with the worst bear market and recession since the Great Depression. In response, the Federal government and Fed took unprecedented (then) actions to support the economy and the market. TARP and massive fiscal stimulus was provided by the government while the Fed cuts interest rates to nearly zero and the market and economy began to recover. Quantitative easing (treasury and mortgage bond buying) by the Fed provided further support and liquidity to the financial system. As a result the market and the economy began to recover, and the market enjoyed well above average gains during the “Worst Months” of 2009.
[BSM Table]
Since the March 2009 market bottom, the market has enjoyed five periods of outsized gains during the “Worst Months.” The first was 2009; then again in 2010, 2013, 2017 and 2020. ZIRP (zero interest policy) and the recovery from the 2007-2009 Financial Crisis enhanced the Worst Months of 2010, a third round of QE boosted 2013, corporate tax cut anticipation lifted 2017 and the 2020 recovery from the Covid-19 shutdown and massive fiscal spending pumped up 2020. It is primarily these five years and the corresponding seemingly one-off events that have resulted in the market outperforming our Seasonal Switching Strategy over the last twelve years. We are of the opinion that this is an exception, not some kind of new normal where black swan events and major disruptions occur every few years.
Some gains have been left on the table by the Seasonal Switching Strategy however; this is only part of the bigger picture. The potential benefits of reduced risk have not been taken into consideration. NASDAQ has not suffered a single decline during its “Best Months” since 2007 (page 60 2021 STA) and its average gain has been 12.2%. 2020’s “Best Months” declines by DJIA and S&P 500 were their first since 2008. Even during the last twelve years the pattern of “Best Months” and “Worst Months” has held up. Though the current “Worst Months” period has not ended yet, average performance is still about two times (2X) better during the “Best Months.” 
Based upon history, the Seasonal Switching Strategy may be on the verge of beginning its next stretch of outperformance. Life will be forever changed by Covid-19, but in general we have seen a return to a more normal economy and way of life this year. Uncertainty does remain high but many have resumed normal, pre-covid-19 activities. Recent market behavior indicates to us that seasonality is not dead and that the Seasonal Switching Strategy is likely poised for continued outperformance this year and beyond.
Seasonal MACD Buy Signal Update & Methodology
[DJIA Daily Bar Chart with MACD]
[SP500 Daily Bar Chart with MACD]
[NASDAQ Daily Bar Chart with MACD]
As we close the books on Q3 and turn the calendar to October the window for issuing our Seasonal MACD Buy signal opens. Using our pre-defined MACD parameters for our Seasonal Buy Signal of 8-17-9 we can see in the above charts that MACD has been trending lower since the early part of September with recent weakness only serving to push the indicator deeper into negative territory. Generally, the deeper below the zero-line MACD is the more reliable the subsequent crossover signal tends to be. 
For recent and long-term members, the criteria to issue our Seasonal MACD Buy Signal is a new MACD crossover on or after October 1 from DJIA, S&P 500 and NASDAQ and all three indexes must agree. Tomorrow the date requirement will be met then it will be up to the market to get out of its recent funk. When all criteria have been met, we will issue an email Alert.