The Market is Setting Up for Another “Bear Market Rally”

September’s Pains are October’s Gains

I recently made a prediction in my most recent trade recommendation.

And it has so far been proving true. (You can access these trades here in the Dollar Trader, if you’re into that sort of thing.)

In the last alert I issued, I recommended buying put options on QQQ and then, after profiting, transitioning into buying QQQ outright.

The whole basis of that trade was an observation I made that I have not yet seen any other analyst make: Markets, but especially tech and growth stock indices, tend to do poorly before U.S. Federal Reserve meetings.

In the month following these meetings, however, these indices tend to see a nice “pop” in value.

Those options, if you purchased them, seem to have paid off quite well.

And if you had purchased QQQ at the very end of September? You’ve already seen a fairly impressive gain.

And I think this might be just the beginning.

You see, I believe the market is setting up for another “bear market rally.”

A bear market rally is a period when stocks go up in value briefly during a broader period of decline.

That is, all the data and evidence seem to be pointing to stocks doing fairly well in October and November…

But then potentially struggling again in December and the first few months of 2023.

The reasons are fairly extensive. But they mainly have to do with the unique peculiarities of the financial world in these months.

September, for example, is a notoriously bad month for stock investors.

Across every September since 1985, the Nasdaq has averaged a loss of -0.93%. And across every September since 1952, the S&P 500 has averaged a loss of -0.76%.

There are many theories why. My professional opinion is that, because many mutual funds and ETFs and companies end their fiscal years on September 30, many managers sell underperforming stocks. They do this so that they look better when it is time to issue annual documents that include a list of asset holdings and the performance of those holdings.

All this selling by huge institutional banks and funds quite naturally drives stock prices down.

But Octobers (and Novembers) are entirely different.

Across every October since 1985, the Nasdaq has averaged a gain of 1.4% (excluding 2008). And across every October since 1952, the S&P 500 has averaged a gain of 1.1% (excluding 2008).

October gains are bigger than September losses!

Why? Is it because these fund managers are piling back into the stocks they sold?

Here is my theory: The market is a “forward looking” entity. Stock prices over the short term tend to reflect investors’ short-term expectations and predictions.

That is a fancy, complicated way of saying something pretty asinine: “Stocks go up because people think stocks are going to go up.”

And in the final three months of the year, people tend to think stocks will go up because this is the period when companies — especially retail businesses — tend to generate the bulk of their revenue and profits.

Over the next few months, in America, we’re going to see Halloween, Thanksgiving, Christmas, and Hanukkah.

Four major holidays based around gift-giving and consumption.

That is, buying stuff. Something Americans are good at doing even if there’s a global economic recession.

That means investors should begin preparing to go where the money is expected to go for the next few months: retail and e-commerce. (You can find my favorite pick in the latest alert of the Dollar Trader.)

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