DJIA : September Crash

(Fri, 4 Sept 2020). As the NASDAQ and S&P 500 set new records, investors should be wary of a September a cyclical stock market crash risk in the month ahead.

A cyclical pattern in equities markets suggests a stock market crash is on the horizon. The present is alarmingly similar to that of 1986 and 2000 when the S&P 500 fell 8.5% and 5.4% in September after a bullish August. The professionals managing big institutional money are taking shelter for a September market crash. September is historically the worst month of the year for stocks on average since 1950. There are many theories why. One goes that money managers back from vacation in the summer exit all the positions they were planning to sell. But whatever the reason, equities are usually on sale in September.

This September, though, is complicated by a number of odd factors. They make a major selloff a bigger risk for buyers and holders of equities pushing benchmarks to record highs.

Here are the threats sending some investing pros running for the hills; A second, miserable flu season wave of coronavirus outbreaks, Chaos in the 2020 election, An abrupt cool down from August highs.

Past August Booms Corrected Sharply in September

A recent note from LPL Financial drew attention to a threat to the stock market’s recent exuberant growth. The usual September lull in stock prices was more pronounced in previous years when the S&P 500 gained more than 5% in August.

This August was the S&P 500’s best since 1986, topping off its biggest 5-month gain since 1938. If it doesn’t correct in September and October, prices might be in bubble territory.

Add the danger of a “Zoom Thanksgiving” in a second wave of coronavirus. No wonder Barry Knapp, Ironsides Macroeconomics’ director of research said a risk off event is likely.

Stock Market Pros Ducking for Crash

Allianz Chief Economic Adviser Mohamed El-Erian warn a wave of corporate bankruptcies threatens the stock market. He warned that not all is as it seems to retail investors looking at the big players today.

He explained, however, that sophisticated investors are leaving tracks in the derivatives markets showing their cautious, even bearish approach to stock valuations. Their actions in the options pits reveal a lot of tail protection for declining stock prices.

El-Erian says, “it’s hard to overstate the extent of today’s risk-taking in US financial markets” and warns stock market mania “exposes small retail investors to big potential losses.” He argues current valuations are not justified until the economy and corporate fundamentals go through a “sustained and convincing recovery from Covid-related damage.”

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