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September Surprise? 3 Unexpected Reasons Wall Street Might Dance to a Different Beat
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Over the past twenty years, the S&P 500 Index ETF ((SPY - Free Report) ) and the Nasdaq 100 ETF ((QQQ - Free Report) ) have averaged losses in September. However, investors are best served to look beyond a twenty-year average. On Wall Street, context is crucial in successfully determining the market’s direction. In the past twenty years, few markets have exhibited the type of power the 2023 market has. Understanding the context in which a market is operating in is essential for making informed investment decisions. Below are three reasons the robust start to 2023 means September into year-end will turn out to be bullish for stocks:
Power off the Bottom Tends to Persist
The 200-day moving average is the most widely used moving average to size up the general market trend. Though most investors simply gauge whether a stock or market is above or below the moving average, a unique and powerful way of studying the moving average is to monitor the price’s distance away. According to hedge fund consultant Seth Golden, the Nasdaq has been 20% below the 200-day moving average and risen 20% above the moving average only four times since 1985 (1991, 2003, 2009, 2023?). Fascinatingly, each time, the month of August marked a consolidation point, which ultimately marked the low for each year.
Image Source: Zacks Investment Research
Intermediate Trend: 21-Week MA is the Best Guide
The best way to learn about a subject is to simply observe it. In other words, if you’re tasked with learning about fish, you should first sit next to a fish tank and observe how they act. Wall Street’s version of the “fish tank” is the price and volume chart. As a reasonable doctor would not make a diagnosis decision on a patient without conducting an X-Ray, a good investor should not make a decision on a stock or market trend without consoling a price and volume chart. In keeping with our simple observation framework, by observing a simple price chart of the Nasdaq 100 Index ETF with an overlayed 21-week moving average, one can observe that the area is a critical level to watch from an intermediate-term trend-following perspective.
Image Source: TradingView
For example, after the COVID-19-induced crash of 2020, once QQQ regained the moving average, it never looked back. In the next few months, the QQQ would nearly double and successfully retest the level five times. Conversely, once the QQQ broke the 21-week MA in early 2022, it dropped from ~$380 to ~$245 and bumped its head on the 21-week twice. Finally, in January 2023, a decisive close above the 21-week set off the animal spirits, and the tech and growth-heavy Nasdaq 100 never looked back. In the latest development, the QQQ got close to the 21-week MA in mid-August before being bought up with a vengeance.
Image Source: TradingView
Strength Begets Strength
On Wall Street, trends tend to persist much longer than most expect. What seems too high often goes higher. For 2023, historical data backs up this sentiment. When the S&P 500 Index from January through July is greater than 10%, and August is red, the remainder of the year is up 100% of the time historically for an average gain of 9.9%. In other words, if history repeats itself, equities have a lot more meat on the bone into year-end.
Image Source: Ned Davis Research
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September Surprise? 3 Unexpected Reasons Wall Street Might Dance to a Different Beat
Over the past twenty years, the S&P 500 Index ETF ((SPY - Free Report) ) and the Nasdaq 100 ETF ((QQQ - Free Report) ) have averaged losses in September. However, investors are best served to look beyond a twenty-year average. On Wall Street, context is crucial in successfully determining the market’s direction. In the past twenty years, few markets have exhibited the type of power the 2023 market has. Understanding the context in which a market is operating in is essential for making informed investment decisions. Below are three reasons the robust start to 2023 means September into year-end will turn out to be bullish for stocks:
Power off the Bottom Tends to Persist
The 200-day moving average is the most widely used moving average to size up the general market trend. Though most investors simply gauge whether a stock or market is above or below the moving average, a unique and powerful way of studying the moving average is to monitor the price’s distance away. According to hedge fund consultant Seth Golden, the Nasdaq has been 20% below the 200-day moving average and risen 20% above the moving average only four times since 1985 (1991, 2003, 2009, 2023?). Fascinatingly, each time, the month of August marked a consolidation point, which ultimately marked the low for each year.
Image Source: Zacks Investment Research
Intermediate Trend: 21-Week MA is the Best Guide
The best way to learn about a subject is to simply observe it. In other words, if you’re tasked with learning about fish, you should first sit next to a fish tank and observe how they act. Wall Street’s version of the “fish tank” is the price and volume chart. As a reasonable doctor would not make a diagnosis decision on a patient without conducting an X-Ray, a good investor should not make a decision on a stock or market trend without consoling a price and volume chart. In keeping with our simple observation framework, by observing a simple price chart of the Nasdaq 100 Index ETF with an overlayed 21-week moving average, one can observe that the area is a critical level to watch from an intermediate-term trend-following perspective.
Image Source: TradingView
For example, after the COVID-19-induced crash of 2020, once QQQ regained the moving average, it never looked back. In the next few months, the QQQ would nearly double and successfully retest the level five times. Conversely, once the QQQ broke the 21-week MA in early 2022, it dropped from ~$380 to ~$245 and bumped its head on the 21-week twice. Finally, in January 2023, a decisive close above the 21-week set off the animal spirits, and the tech and growth-heavy Nasdaq 100 never looked back. In the latest development, the QQQ got close to the 21-week MA in mid-August before being bought up with a vengeance.
Image Source: TradingView
Strength Begets Strength
On Wall Street, trends tend to persist much longer than most expect. What seems too high often goes higher. For 2023, historical data backs up this sentiment. When the S&P 500 Index from January through July is greater than 10%, and August is red, the remainder of the year is up 100% of the time historically for an average gain of 9.9%. In other words, if history repeats itself, equities have a lot more meat on the bone into year-end.
Image Source: Ned Davis Research