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?


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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.

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Brian Brotherston
Qualified Associate Financial Planner
Watershed Financial Solutions
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