Daily Commentary - Posted on Thursday, September 9, 2010, 8:36 PM GMT +1

3 Comments


Sep Thursday 9

September's and Labor Day's Almanac

On Wednesday, September 8, Rennie Young from MarketTells (highly recommended) presented a very interesting and telling study concerning the negative month-end implications of a down-day immediately following the Labor Day (exchange) holiday. Just as a reminder: the S&P 500 closed lower -1.15% on Tuesday, September 7.

Rennie showed that (cited from MarketTells, thanks a lot to Rennie for his allowance) ‘in 18 out of 23 occurrences, or 78% of the time, the S&P proceeded to trade lower heading into the end of the month. In only two cases out of twenty-three did the S&P manage a gain of 1% or more, while it fell 1% or more fifteen times. The average gain was a modest 1.2%, while the average loss was over three times as large at 4.0%. This indicates upside potential is likely to be capped below the August highs for the next few weeks, and that there’s still potential for September’s month-to-date gain of 4.7% to be completely erased over the next few weeks‘.

And historically, it’s even worth. Not only was the S&P 500 more than often trading at a significant lower level at the end of September, regularly impending weakness already showed up one week later.

Table I below shows the S&P 500‘s historical performance (since 1940) over the course of the then following 5 , 10 , 15 and 20 sessions assumed one went long on close of a session when the S&P 500 closed lower on the session immediately following the Labor Day (exchange) holiday.


( * not even one close above the trigger day’s close during the next 20 sessions)

Highly visible a down-day on a session immediately following the Labor Day (exchange) holiday historically had significant negative implications on the S&P 500’s short- and intermediate-term performance. Since 1940, out of 28 occurrences the S&P 500 was trading higher 5 sessions later on only 10 (36% of the time), 10 and 15 sessions later on only 8 (29% of the time), and 20 sessions later on only 7 (25% of the time or every one out of four) occurrences, significantly below the at-any-time probability for a higher close x sessions later. And on 8 out of those 28 occurrences, the S&P 500 was not able to post even one higher close over the course of the then following 20 sessions (the latter is lapsed with respect to the current year, but the S&P 500 is still trading below last Friday’s close, the session immediately preceding Labor Day).

In addition, the proportion between the maximum gain and maximum loss (over the course of the then following 20 sessions) is not only significantly skewed in favor of the downside, upside potential is regularly (very) limited as well.

And even the fact that the S&P 500 is down year-to-date on September 7, 2010 might provide an (negative) indication for the S&P 500’s potential performance over the remainder of the month. Table II below shows the S&P 500‘s historical performance (since 1940) over the course of the then following 5 , 10 , 15 and 20 sessions assumed one went long on close of a session when the S&P 500 was lower year-to-date on the session immediately following the Labor Day (exchange) holiday.

( * not even one close above the trigger day’s close during the next 20 sessions)

When the S&P 500 was trading lower year-to-date on the session immediately following the Labor Day (exchange) holiday in the past, this had significantly negative implications over the course of the remainder of the month as well. Out of 23 occurrences (since 1940), the S&P 500 was trading higher (above the S&P 500’s close on the session immediately following Labor Day) 5 and 10 sessions later on only 7 (30% of the time), and 20 sessions later on only 6 (25% of the time or every one out of four) occurrences.

For comparison and bechmark purposes, table III below shows the S&P 500’s performance over the course of the then following x sessions assumed one went long on close of …

  • Strat. #1: any session within the month of September,
  • Strat. #2: a session where the S&P 500 closed lower, and finally
  • Strat. #3: a session immediately following an exchange holiday where the S&P 500 closed lower.

Highly visible that at-any-time as well as setup #1, #2 and #3 probabilities for a higher close 5 , 10 , 15 and 20 sessions later (regularly at least even) significantly surpasses the respective ‘Labor Day‘ probabilities (between 20% and 30%), so even taking into account the statistically insufficient sample size (28 and 23 occurrences respectively) there might be something special (telling) about the session immediately following Labor Day.

But longer-term (what about a year-end rally ?) there might be good news as well.

Table II below shows the S&P 500‘s historical performance (since 1940) over the course of the then following 20 (~ 1 month), 40 (~ 2 month), 60 (~ 3 month) and 75 (~ year-end) sessions assumed one went long on close of the last session of the 37th week of the year (regularly between the 10th and the 15th of September) in the event the S&P 500 was up month-to-date on this respective last session of the 37th week of year (would be triggered in the event the S&P will still be up month-to-date on the close of Friday, September 10, tomorrow’s session).

Interesting to note that the market shows a significant longer-term positive tendency, especially with respect to a potential year-end rally. Whenever the S&P 500 was up month-to-date at the final session of the 37th week of the year (regularly between the 10th and the 15th of September), the index was trading at an even higher level approximately 3 month (~ 60 sessions) later (on 25 out of 33 occurrences, thereof on the last 13), and at/around the end of the year as well (on 12 out of the last 13 occurrences).

Therefore in the event the S&P will still be up month-to-date on the close of tomorrow’s session (Friday, September 10), any weakness at or around the end of September (taking into account the negative effect of the Labor Day setup mentioned on top of this posting) could provide a buying opportunity targeting a potential year-end rally.

Successful trading,
Frank

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Disclaimer: No position in the securities mentioned in this post at time of writing.

Remarks: Due to their conceptual scope – and if not explicitely stated otherwise -, all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in-, do not use leverage (e.g. leveraged ETFs) - but a marginable account is mandatory -, do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility) , do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets).

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Comments (3)

 

  1. kafka says:

    What would be the reason for such correlation (setup 1)? It looks like pure data-mining. Overall, September is “a dark month”:

    Min. 1st Qu. Median Mean 3rd Qu. Max.
    -0.11930 -0.02855 -0.00348 -0.00528 0.03201 0.08314
    versus all months:
    Min. 1st Qu. Median Mean 3rd Qu. Max.
    -0.217600 -0.017830 0.009091 0.006629 0.035210 0.163000

    I didn’t test, but you mention, that end of September tends to be negative as well. If it is already negative, then Labor’s day impact can be questioned.
    Thank you for sharing.

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