For the past three weeks, I have written about the need for a short-term pullback in stocks. I have been and remain positive on the intermediate and long-term view for the stock market. Remember, pullbacks can come by stocks going sideways for a period of time or by prices declining enough to entice buyers back in.
In the major indexes, we saw a split pullback, with the Dow Jones Industrial Average, S&P 500 and Nasdaq 100 going sideways while the S&P 400 and Russell 2000 declined from 2.65% to 3.7%. The former indexes are now sitting at fresh highs and the pullback clearly ended Sept. 15.
Let me be clear: I remain positive over the intermediate and long-term. However, before you assume that stocks are going to rocket higher from here, which they may, there are still a few hurdles to overcome in the seasonality department.
Last week, the markets bullishly digested the Fed meeting, Janet Yellen's news conference and the Scottish vote not to leave the United Kingdom. Alibaba went public on Friday and, like other very high-profile public offerings with stocks closing their first day of trading at or close to new highs, the bears came out of the woodwork to predict the perfect end of the bull market on “Baba Day.”
While I completely disagree with that assessment, the stock market has entered the most negative seasonal period of the year, which sounds a lot worse than it actually is.
From Friday's up opening through Sept. 30, no other calendar period is as negative — historically — than right now. But before you jump into that super bear camp, realize than seasonal trends or seasonality are nothing more than a head wind or tail wind. Markets do not reverse course simply because of seasonality. It just helps add a little energy.
Besides the specific calendar challenges, there is also an added negative that follows the September expiration of options and futures, which occurred last Friday. That trend shows a head wind most of last week, but particularly earlier in the week. Finally, with stocks rallying into the Fed statement as well as after it, there is another little trend I call the “Fed hangover,” which indicates some very short-term weakness.
How is all this research best used?
From my seat, since I remain positive over the intermediate and long term, I think it will be very instructive to see how the stock market performs through month's-end. If stocks can hang in and only see another mild pullback, worst case, that would reinforce the bullish case and set the stage for a run to Dow 18,000 in the fourth quarter.
Paul Schatz is president of Heritage Capital.
