3 Ways to Hedge the September Swoon

by Chris Johnson | August 30, 2012 12:33 pm

As we head into the last few days of August trading, the market will soon turn its attention to September and the seasonal patterns that often drive prices.

And that’s not good.

September is among the worst-performing months for the S&P 500, with the benchmark index averaging a 0.6% loss.

Before I get a little deeper into the seasonal trends, let’s take a look at where we are now. With only a few days left in August, the S&P 500 is up by 2.2% — a return that is remarkably close to the average positive returns[1] for August performance since 1990 and an example of why we watch seasonality trends in the first place.

That brings us back to September. Digging deeper, the win/loss ratio for September since 1990 is 50/50, again making it the second-worst month to be long the market. (For those wondering, the best month is December, with an average return of 2% and a win/loss of 82/18.)

This means the odds of positive performance in September are essentially as good as a coin toss — except for the fact that, if you win you get 3.8%, but if you lose it costs you 5%. Anyone willing to take that payoff on a 50/50 bet won’t be around the market for too long.

Here are the monthly stats:


So, how can you trade the unattractive September seasonality? Let’s look at three options:

Inverse, or Bearish, Exchange Traded Funds

The ETF world offers some great alternatives for investors that are looking to hedge their portfolios from potentially weak markets. Inverse ETFs like the ProShares Short S&P500 (NYSE:SH[3]) allow investors to profit from a market sell-off. These shares will appreciate roughly 1% for every drop of 1% in the S&P 500, making them an easy way to cash in on declines.


Go Long Volatility Like a Pro

The CBOE Volatility Index (VIX), also known as the “Fear Index,” is coming off of some of its lowest readings of 2012[5] as we head into September, suggesting that we will see a rise in market volatility over the next few weeks.

Through the magic of ETFs, you can hedge market volatility like a pro by checking out the iPath S&P 500 VIX ST Futures ETN (NYSE:VXX[6]). VXX shares go up as the VIX rises, offering an alternative hedge for shaky markets. Our forecasts suggest a target of 15 or higher in September, which is more than 25% higher than the latest close — not a bad alternative.

Check Your Options

The low VIX readings suggest that option premiums are relatively cheap, meaning that “insuring” your portfolio with options is inexpensive. When looking to protect a portfolio with options, it often is wise to keep it as simple as possible.

For that reason, we like the SPDR S&P 500 ETF (NYSE:SPY[7]) October 140 Put (SPY121020P00140000). This option recently closed at $316 per contract. Given our current short-term target of $138 for the SPY, this option has the potential to appreciate to more than $450 during the month of August — a 42% return based on current prices.

This, of course, is the most aggressive approach for those willing to speculate around a potential September swoon.

As of this writing, Chris Johnson did not hold a position in any of the aforementioned securities.

  1. average positive returns: https://investorplace.com/2012/08/dont-label-august-a-winner-yet/
  2. [Image]: https://investorplace.com/wp-content/uploads/2012/08/SeptGraph1.jpg
  3. SH: http://studio-5.financialcontent.com/investplace/quote?Symbol=SH
  4. [Image]: https://investorplace.com/wp-content/uploads/2012/08/SeptGraph2.jpg
  5. some of its lowest readings of 2012: https://investorplace.com/2012/08/with-vix-this-low-what-you-need-to-know/
  6. VXX: http://studio-5.financialcontent.com/investplace/quote?Symbol=VXX
  7. SPY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPY

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