It’s a new month, traders…
As we head into the Fall season, you may have heard traders discussing the “September Effect” — but what are they talking about?
They’re referring to the historically weak stock market returns seen during the first month of Fall…
Speculation runs rampant about what causes the September Effect.
Popular theories point to post-vacation indecision, equity sales to pay for school supplies, and year-end tax-loss selling as likely causes of an overall September slump in the markets.
Regardless of the cause, the effect itself is hard to ignore…
Let this sink in — September is the only calendar month with a negative Dow Jones return over the last 100 years.
Chart courtesy of TipRanks
The data is clear: September can be tough for stocks, but you don’t have to let it ruin your trading strategy.
Today, we’ll investigate what causes the September effect. Then, I’ll show you how to stay profitable when the market historically isn’t.
What Causes the September Effect?
While no one knows exactly what causes it, here are some popular theories:
Post-Summer Pessimism: After the summer season ends, traders might feel less optimistic about the market. The return to work and routine can bring a more cautious mindset, leading to more selling than buying. This shift in sentiment can create downward pressure on stock prices.
Tax-Related Selling: In the U.S., some investors need to make mandatory withdrawals from tax-advantaged accounts like IRAs by the end of the year. September is a common time for these withdrawals, which can lead to increased selling in the market, contributing to the overall decline.
Fund Rebalancing: Mutual funds — whose fiscal years often end in October — might start selling underperforming stocks in September to improve their year-end reports. This rebalancing of portfolios can add to the selling pressure, especially if many funds are doing it simultaneously.
Back-to-School Costs: As the new school year begins, some traders might sell stocks to cover back-to-school expenses, such as tuition, books, and supplies. This additional selling can further weaken the market during September.
Economic Data Releases: September often brings important economic reports, like employment figures, inflation data, and updates from the Federal Reserve. These reports can create uncertainty in the market, leading to increased volatility and potential sell-offs as traders react to the new information.
Self-Fulfilling Prophecy: There’s a belief among traders that September is historically a bad month for stocks. If enough investors act on this belief by selling their stocks, it can actually cause the market to drop, fulfilling the expectation of a September slump.
How to Trade Through the September Effect
I wouldn’t change your plan just because the calendar flipped from August to September.
That said, you need to be aware of the unique nature of September market sentiment and adjust your risk management accordingly…
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My advice is to be greedier with your winners (booking profits quickly) and more merciless about cutting losers immediately.
If you’re up on unrealized gains, take the money and run. But if your position is bleeding out and you’re “holding and hoping,” cut the loss immediately and move on to the next trade.
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I’ve been trading for 25 years and experienced over a dozen September trading periods.
I’ve learned it’s important to be aware of the September Effect — but don’t let it change your entire strategy.
While September has a reputation for being a tough month, it’s important to remember that market trends can change.
Just because September has been historically weak doesn’t mean it will be this year.
Expect the best, prepare for the worst, and have a solid trading plan for anything the market throws at you.
If you want help forming your trade plan, join us in the Daily Income Traders community. It’s live, 100% free, and we go over this concept every day.
Have a great day everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade
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