We are one week away from the dreaded September-October period which has, more often than not, resulted in a major down-move. Most remember the crash of 1987; speak of the crash of 1929, the sell-off in 2001 (and many others) that ended in October. And here we are as the S&P 500 is reaching all-time highs, having risen 60% since March. Can it continue as the September-October period begins? Will the bull market, which began in 2009 and was temporarily interrupted by the March “flash-crash,” continue in the next two months, or will it take a breather?


The S&P 500′s inexorable advance opens up four possible scenarios for the next two months. It could: (1) continue its current upward trajectory; (2) consolidate in a trading range near current levels before pushing higher; (3) move quickly above 3,500 but then fall back (a “false breakout”); or (4) stay flat for a week or so and then collapse.

Scenario No. 3 or No. 4 is the most likely, considering: (1) the coming of the above mentioned volatile period; (2) Presidential election years tend to offer particularly weak returns during the autumn; (3) The S&P 500′s negative internal momentum divergences; (4) Volume is tailing off; (5) The S&P 500 remains overbought: 73% of its stocks are trading above their respective 50-day Moving Averages; (6) The FAANG stocks have lost some of their upside momentum; (7) There is downside cyclical pressure until the end of October; (8) Sentiment (a contrary indicator) remains very positive: the latest Investors Intelligence data shows 60% of surveyed advisers are bullish, and bearish adviser readings are at a 2½ year low; (9) The S&P 500 is now 400 units above its 200-day Moving Average (10) the resurfacing of FOMO (the Fear Of Missing Out), as illustrated by the higher ratio of call option vs. put option buyers. And finally two non-technical signals: there is no resolution to the virus, and the third-quarter earnings aren’t likely to be better than the preceding quarter.

In summary, investors need to ask if recent market outperformance could continue, or is it time for a slowdown and to be a little more cautious. In reaching a decision, here’s my advice: It is better to lose some gains than to gain some losses.

This Globe and Mail article was legally licensed by AdvisorStream.

Brian Brotherston profile photo
Brian Brotherston
Qualified Associate Financial Planner
Watershed Financial Solutions
Mobile : 604-813-4036
Schedule a Meeting