How to Approach September in the Stock Market (2000 vs. 2010)

Note:  This lesson is meant to help you learn from the market and does not serve as investment advice for any specific group or individual.  For more information, please read the HSR Terms of Use.

September 2010

September 2010 was year 10 of the secular bear market that began in 2000.

However, September 2010 contrasted very differently from September 2000 for at least 5 reasons:

1. First Market Correction of the Uptrend - The market correction that lasted from April to August 2010 was the first significant correction since the uptrend began in March 2009 (see chart 21, page 23). 
   
   A similar situation presented itself in November 1971, September 1975 and November of 1978 during the Secular Bear Market of 1966-1982.  Those dates were all low points in the first market correction of each respective cyclical uptrend.
   
   Additionally, during the Secular Bear Market of 2000-201X, stocks bottomed in August of 2004 before moving higher.  This was also the first significant market correction of the uptrend that began in March 2003.
   
   At the start of September 2000, stocks had been rallying for 3 months off a low after crashing in the spring.  It wasn't the first correction of an uptrend because stocks were locked in an 18-year secular bull market.  The NASDAQ also completed a blow off move in March 2000 that included many tops in technology stocks (the strongest sector for the market).
   
   The 1st correction of a market uptrend is usually a temporary move lower that sets up a resumption of the uptrend.
2. Undercut of a Low - The deepest week of the NASDAQ's correction (Week ending 07/02/10) put in a bottom after undercutting the February 2010 swing point low (see chart 22, page 24).  The market spent the next two months backing and filling (bases were building) before moving higher in September 2010.
   
   At the start of September 2000, the market was rallying into a high and didn't undercut a prior low.  In fact, it almost took out its July 17th high of 4,289 on September 1st.  Markets tend to reverse lower after taking out (surpassing) an old high (July 2000).  This didn't happen in the Summer of 2000, but it's an important behavior of price to understand.
   
   During market uptrends, price may bottom after undercutting a prior low.
3. Technology Stock Strength - Technology stocks (among other sectors) were breaking out of bases and leading the market while it was still stuck in correction mode, a bullish divergence (see chart 23, page 25).
   
   At the start of September 2000, technology stock leadership was present, but it was getting thinner after many years of strength.  This was important because many other stock sectors weren't leading (or setting up to lead) and the secular bull market was 18 years old.
   
   Technology stocks tend to lead at the beginning of an economic expansion.
4. Bases in Other Groups/Sectors - In late August 2010, other sectors were basing and looked mature (ready to break out) (see charts 24-28, pages 26-30).  The market's late August low was followed by base breakouts en masse over the next several months.  These breakouts came from a broad background of industry groups/sectors, which indicated stock leadership was expanding.
   
   At the start of September 2000, other stock sectors were already weak, existing leadership was tired and/or extended and the market had little waiting in the wings to carry it higher.
   
   Many market uptrends start with stocks breaking out of bases.
5. Negative Investor Sentiment - Because of the Flash Crash (May 6, 2010) and the time of the year (September), many investors were bearish on the market.  The AAII Bull/Bear Sentiment Survey registered a reading of 50% bears for the week ending 08/27/10.  This was a high amount of negativity, but it was a secondary indicator to the market's price action.  Given the positive technical condition of the market (primary indicator), it's not a surprise that the market rallied until May 2011 (see chart 29, page 31).
   
   At the start of September 2000 (according to AAII), most stock investors were bullish (56%) and there were very few bears (18%).  Many people thought that stocks would continue higher after the spring correction.  Unfortunately, technology stocks were vulnerable and stock investors late to the game were trapped with losses after the market declined in March-May 2000.
   
   Markets like to fool the majority and move when it's least expected.

So, is there really a specific approach for the month of September?

As shown in this historical review, there is no difference in the way that you approach September than any other month.

Why is this true?

Mainly because the market's opinion always comes first regardless of the month.

September typically performs poor for stocks, but this is a secondary indicator to price.

It's far more important to find out where the market stands technically before exiting the market due to the perception of a negative monthly/seasonal trend.

Looking at the market with stock charts will help you evaluate September's potential because you're aligning yourself with the majority of stock investors.

This requires attention to detail, but knowing what to look at is very helpful in preventing you from falling victim to personal opinion.

You can also use the market to help you evaluate the bearish seasonal trend that follows the month of April.

In May, the advice often given is to "sell in May and go away", but it's a good idea to look at the market first to see if the bearish seasonal trend (May-October) is valid.

Keep in mind that sometimes a seasonal trend may be valid, but is short-lived because the market reacts normally.

For example, in May 2000, the market declined nearly 12%.

As a result, those who sold at the beginning of May were glad they listened to the bearish seasonal trend ("Sell in May and Go Away").

However, the market was in the process of retesting its April low in late May 2000 (see chart 31, page 33).

A retest of a low is a common price behavior that occurs when a market bottoms.

Ideally, the retest will be on lower volume than the initial low, but not always.

The NASDAQ then rallied 40% from its May 24th bottom (retest) to its July 17th high.

Many stocks experienced large gains off this low, which conflicted with the bearish seasonal bias and made a lot of investors confused on the market.

As for the April 2010 Top, the market showed heavy distribution for the week ending 04/30/10.

During that week (week ending 04/30/10), many stocks broke their 10 Week and 40 Week EMAs on heavy volume. 

Stocks also exhibited weekly price reversals and churning, which are negative price behaviors within uptrends.

This all occurred underneath the surface of a moderate market decline for the week, but it was very important to recognize the behavior of individual stocks.

The following week (week ending 05/07/10), the market (Dow 30) crashed 1,000 points intraday and the "sell in May and go away" seasonal advice worked well because the market started correcting the prior week.

As we all know, the market continued downward until August 27, 2010.

In both examples above (2000 Market Low and 2010 Market High), do you see how important it is to listen to the market over advice on seasonal trends?

If you do this, you will have a more accurate view of the market.

More importantly, you'll be in a position to be objective and identify the potential for the market to move higher or lower based on stock price behaviors.

The NASDAQ fell nearly 13% in September 2000 and began a vicious bear market that bottomed in October 2002.  Stock leadership declined in important groups during the latter part of 2000.  In 2000, the market was all about technology stocks and when they declined, the bull market in stocks was over.

The S&P 500 rallied 10% in September 2010 and continued a bull market advance that began in March 2009.  Stock leadership expanded as the market rallied until another correction took place in mid 2011.

Please >>CLICK HERE<< for the historical charts from 2000 and 2010.

Do you want more educational resources?  Please sign up for my free newsletter on my homepage >>HERE<<.