Book Big Wins and Crush September Trading

They thought Irma would swallow Florida whole.

But a last-minute change in trajectory saved the Miami metro area from a direct hit. While Irma dished out damage across the state, the devastation the media has reported so far was not nearly as extensive as was initially feared. Even Disney World is set to reopen today. The happiest place on earth never lost power during the climax of the hurricane and was spared extensive damage, according to numerous reports on social media.

Investors celebrated this victory against the elements by sending stocks back toward their all-time highs. The major averages jumped more than 1% to start the new trading week. Across the world, stocks are climbing this morning as the MSCI All Country World Index hits record highs.

Now that the hurricane has made landfall and weakened, we’re able to form a clearer picture of its impact. After all, the exact path of a hurricane is notoriously difficult to predict. After Harvey left Houston underwater, we were conditioned to expect complete annihilation from Irma.

Natural disasters and other unpredictable world events can create a lot of uncertainty in the markets.

Forget what you now know this morning. Just look at this map of Irma’s potential paths meteorologists released just 10 days ago:

Irma Map

While we had a general idea as to where Irma could make landfall, we had no clue how the storm and its aftermath would play out in real-time.

We can say the same about the markets. Our analysis can help us ride out the storm. Yet we rarely know where our investments will ultimately wash up.

Negative events pop up and convince us to prepare for death and destruction. But our survival instincts occasionally betray us…

You’ve probably heard that September is historically a bad month for stocks.

But that’s not entirely accurate.

Like most stock market myths, this one starts out with a little bit of truth behind it.

According to Bespoke Investment Group, September is the only month of the year that’s been negative on average for the last 100 years. And in the last 20 years, September has led to negative 0.7% returns on average.

“There are a couple big problems with those numbers,” our stat man Jonas Elmerraji explains. “First, the average most folks are using is the arithmetic mean. Means don’t deal with outliers well. And investing returns are packed with outliers. In other words, the utterly massive negative 13.6% return that the S&P 500 logged in September 2008 has a disproportionate effect on how September looks versus the rest of the years.”

Jonas has come up with a better solution – one that doesn’t rely on arbitrary calendar months.

Enter the Kinetic Composite. The Kinetic Composite shows an idealized price line based on historical stock price data Jonas explains, solving these seasonality problems.

“It’s mathematically scaled so that big outlier years don’t give us misleading results,” Jonas continues. “And it’s continuous, which means that we aren’t hamstrung into looking at arbitrary timeframes like calendar months.”

Here’s what the Kinetic Composite looks like for the S&P 500 in September based on the last 20 years’ price action:

kinetic composite

The black line is the Kinetic Composite. The red line Jonas added connects the start and end points for the month.

It’s easy to see that the Kinetic Composite finishes lower in September (but not by much). But investors are missing the huge price spike in the middle of the month.

“September isn’t a terrible month for stocks,” Jonas concludes. “The first half of the month is actually incredibly bullish for stocks. It’s the second half of September when all the downside has historically taken place.”

Of course, not all stocks are going to trade exactly like our Kinetic Composite chart. Jonas notes that select stocks offer fantastic opportunities in September (you can get in on his next exclusive trade by clicking here).

Futures are screaming higher once again this morning. You can use this melt-up opportunity to lock in some trading gains. That way, you’ll have some new cash to work with after taking gains off the table as we approach peak September seasonal prices.

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning