Watch Out for September’s Second Half!

by Johnson Research Group | September 11, 2013 11:03 am

The S&P 500 has reversed course from a rough August performance, racking up nearly 3% gains in September. Of course, anyone who maintains a watch on the seasonality trends would have seen the August declines coming, as it ranks as the worst month other the calendar for stocks[1].

Current gains aside, September’s trends often play out in favor of the bears — especially the second half of the month.

According to the historical S&P 500 trends, September averages a return of -0.5%, posting losses 48% of the time. The negative bias of the S&P means that stocks should have a slight uphill climb through September. While the month has seen a strong relief rally, a closer look at the tendencies of stocks indicates that it might be a bit too soon to call the month for the bulls.


According to the data since 1990, the S&P 500 averages a loss of 1% for the second half of September. However, a simpler way of looking at these results is to state it in terms of potential gain vs. losses — in this case, a trader averages losses of 2.7% against potential gains of only 1.1%, the kicker being that the trader loses 57% of the time — hardly Vegas odds.


The negative bias has us looking to a couple familiar portfolio hedges to protect profits from the first half of the month:

ProShares UltraShort S&P500

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With the S&P 500 teetering at overhead resistance levels again — namely 1,690 — a hedge on the benchmark index makes sense. The average investor can effectively short the market by buying into the ProShares UltraShort S&P500 (SDS[4]).

As we have pointed out before, the SDS shares move inversely to the S&P 500 at a 2-to-1 ratio, meaning the ETF theoretically should go up about 2% for every 1% decline in the S&P 500. This approach to hedging a lofty market can help to offset potential losses in other areas of your portfolio, which is how the professional money managers hedge their positions ahead of market turmoil.

Our current target for SDS shares matches out July 28 target of $39. A move to this level will net gains of about 6.5%, just like it did the last time we recommended it.

iPath S&P 500 VIX Short-Term Futures

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Similar to our late-July bearish call, we think the iPath S&P 500 VIX Short-Term Futures (VXX[5]) also provides a good hedging opportunity for traders.

The CBOE Market Volatility Index, or VIX, is known as the “fear gauge” of the market, as this barometer of market volatility moves higher when investor anxiety climbs. Those well-versed in the ways of the VIX know that it also tends to spike sharply when the market moves lower.

VXX allows investors to hedge a pullback in the market by profiting from the increase in volatility that is certain to happen when the market declines. However, fair warning: Volatility tends to move quickly, meaning this option should only be utilized by more nimble and active traders.

Our current target for the VXX is for a roughly 20% increase before month’s end, as we see a target price of $17.50.

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

  1. ranks as the worst month other the calendar for stocks:
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  4. SDS:
  5. VXX:

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