Sometimes a tendency in the financial markets become so pronounced and so well known that it one day ceases to exist anymore. You know, like "the stock market always goes up." As another slightly more well-researched example, according to the Hirsch Organization's Stock Traders Almanac, between 1952 and 1989, Monday was the worst trading day of the week, rising only 44% of the time. However, since 1990 Monday has been the best performing day of the week, up 55% of the time. Go figure.

In my most recent book, Seasonal Stock Market Trends, I discuss several dozen seasonal trends existent in the stock market. Many display outstanding track records on a simple stand-alone basis. Nevertheless, all come with the same caveat as every other seasonal financial market trend: future performance may vary. And with that foreboding warning in place, many individuals nervously turn away from the analysis of seasonal trends for something more "reliable." You know, like earnings forecasts (har, good one Jay). Still I claim that investors should at the very least be aware of certain seasonal tendencies, particularly in the stock market.

One of those is impending (cue the scary music!)

September

I have heard several people in the business mention recently the fact that it is "widely known" that September has been the worst performing month for the stock market over the years. And the implication seems to be that we should take this as a contrary indicator and should thus be on the alert for a surprise rally in September. Which certainly could happen. Still, every time I mention this fact to someone "not in the business" they look surprised. So from what I can tell, among people who are already aware of this trend, the awareness is, well, extremely high. Among the greater population, not so much (so perhaps we should just keep this amongst ourselves).

So what does the actual track record for the stock market during the month of September look like? Before I show you, you might want to have small children and any buy-and-hold investors in the room who have recently seen their 401K turn into a 201K, avert their eyes. Because it isn't pretty.

For our test we will assume that an investor started with $1,000 in 1900. Every year since then he invested all of his money in the Dow Jones Industrials Average only during the month of September. The rest of the time his money was safely tucked away in a mattress (that's code for no interest is included in this test as we simply want to highlight month of September performance).

Chart 1 displays the growth, er, destruction of $1,000 invested in this manner.



Chart 1 - Growth of $1,000 invested in Dow Jones Industrials Average only during the month of September (1900-2009)

There are a few things to note about the results displayed in Chart 1. For the record, the original $1,000 starting in 1900 would be worth just $251 today, implying a loss of about -75%. Not exactly the type of return most investors are looking for. The other thing to note is that it is not like the Dow loses money every year during the month of September. Still, the long-term trend is fairly unmistakable.

The Easiest Market Beating Strategy of All-Time

In my book I dubbed the following to be the easiest market beating strategy of all-time, because there simply is not a whole lot to it. Chart 2 displays the results that one would have achieved between 1900 and 2009 (I mean besides just living to be 109) buying and holding the Dow versus buying and holding the Dow only during 11 months every year (and sitting out the month of September each year).

Since 1900, $1,000 invested in the Dow would have grown to $137,000 and change. However, had one simply skipped the month of September altogether each year (for the sake of clarity, this means selling at the close on August 31st each year and buying back in at the close of the last trading day of September), that same $1,000 would have grown to $547,000 and change (not including some interest that could have been earned during the month of September each year).

Chart 2 - Buy and hold (red line) versus sitting out the month of September every year (blue line) - 1900-2009, investing in the Dow 30 starting with $1,000

Summary

So is the implication here that investors should "head for the hills" on August 31st? Not necessarily. Remember, as I said earlier, just because the stock market has shown a marked tendency to decline during September does not mean that it will necessarily be down this September. Remember also that my job here is not to dispense "advice" but simply to advise of certain trends that have caught my attention over the years.

Like this one.

Jay Kaeppel
Staff Writer and Author of Seasonal Stock Market Trends
Optionetics.com ~ Your Options Education Site

Questions for Jay? Please visit "Ask the Traders" through the discussion board on the Optionetics.com home page.

NOTES:

To learn more about Seasonal Stock Market Trends: The Definitive Guide to Calendar-Based Stock Market Investing, please click here.