I’d bet most investors would embrace a healthy change of scenery. I bring good news, states Lucas Downey of Mapsignals.com.
History says a massive rally is coming soon. While on the surface that’s a welcome adjustment, there’s a caveat. Low liquidity Augusts typically spill over into seasonally weak September. It’s a recurring playbook that we know oh so well. 2022 was no different as we told readers to prepare for September volatility. That prescient call didn’t disappoint as stocks shed 9.3% last September.
So, should investors expect equity weakness this September? History says yes…likely not of a similar magnitude. As they say, in life you must sit through some pain to reach the gain… That’s exactly the setup we see in the data. If you enjoy historical studies, you’re in for a treat. But first, let’s take a quick overview of the Big Money landscape. There are clear trends in motion.
Big Money Index Remains in a Downtrend
There’s truth in cold hard data. Especially when it comes to large institutional trading flows. Supply and demand are the ultimate power laws in markets. When demand for stocks is weak, they sputter. That’s been the theme for all of August. The Big Money Index (BMI) shows this beautifully. Since reaching overbought in late July (80%+), the BMI has fallen over 30 points to 51% this morning:
I’ve circled prior red zones. They’ve each prefaced healthy pullbacks. Additionally, notice the green circles signal near-term troughs in stocks too. A northbound BMI is the catalyst we need to see for a sustainable pop. That would indicate real money is being put to work. We aren’t there yet. As a data junky, that would indicate the all-clear signal for stocks. But it’s not just the BMI that can give us clues as to what’s ahead.
Overall trading volumes come into play during the summer months. I’m sure you’ve heard how equity volumes slowed dramatically in August. It’s true. Many professional investors escape on vacations, turning off the screens and hitting the beach. Their absence can be seen below. The following charts plot the daily institutional volumes in stocks and ETFs. Keep in mind, that these are relative volumes. A spike indicates that a lot of trading is underway. Look how the last two Septembers saw an explosion in volumes. Also, notice that the elevated trading has hurt markets the last two years:
A weak BMI coupled with an expected volume surge could breed a near-term swoon. But like anything in life, that’s only half the story. What comes next is the real narrative. History says a massive rally is coming soon. Follow along.
History Says a Massive Rally is Coming Soon
On Wall Street, it’s not where we are that matters. It’s where we’re going. The summertime pullback is set to come to a close, igniting the next leg higher. 2023 is a special year. Back in 1991, pre-election years had one of the strongest seasonal signals out there. Check this out. Below are all pre-election year monthly returns for the S&P 500 since 1991. Of the nine instances, notice a clear pattern circled below:
August and September present headwinds for the S&P 500, falling 1.2% and .8% in those months respectively. But that’s where the opportunity presents itself. Remove the bear suits NOW! October typically kicks off a blistering rally of 4.4%. December jumps 3.1%. In other words, near-term dips, set monster rips. Any notable September weakness should be short-lived based on the evidence. To me, that’s worth playing for.
Let’s wrap up.
Here’s the Bottom Line: Our Big Money Index still signals potential weakness ahead. Couple that with an expected volume explosion in September, we could see markets under pressure in the coming weeks. But that’s likely short-lived. Pre-election years, like 2023, tend to see rocket-sized gains in Q4. History says a massive rally is coming soon.
To learn more about Lucas Downey, visit Mapsignals.com.