September effect: why is September the weakest month in the stock markets?
The so-called September effect is the best-known seasonal effect in the stock markets, i.e. the month of September is the weakest month of the year. This effect is so powerful that it's valuable and important for every trader. To my knowledge no one so far has been able to offer a good reason for that pattern, in the following article I want to present some explanations.
First a (somewhat) older chart from Wallstreet-Online.de with the Dow Jones since 1920 and the German DAX since 1960: September is the only month in the DAX that has a negative performance (-2.3%). January (by far strongest month in the DAX: +2.0%), July (DJIA +1.6%) and December (DJIA +2.0%) are the strongest months.
As an example I quote the excellent analyst Mark Hulbert, founder of the rating agency Hulbert's Financial Digest (Link):
After failing for several years to find a plausible explanation for why September is bad for stocks, I eventually gave up.
One of the existing hypotheses is that the average high in the stock markets is around US Labor Day signaling the end of the vacation time. However, a logical analysis suggests that it should be just the other way round, i.e. market participants hedging the portfolio before leaving for vacation and buying back when they return to work in early September. Hulbert writes on alleged spurious constellations:
My favorite illustration of this phenomenon, which long-term readers of my column will recognize, comes from David Leinweber, founding director of the Center for Innovative Financial Technology at the University of California at Berkeley. Several years ago he searched through all the data on a United Nations CD-ROM to find the indicator with the most statistically significant correlation with the S&P 500. His discovery: butter production in Bangladesh.
Butter is a product of cattle (and India the country of the Holy Cow), so we are again at the topic of the July newsletter: in addition to causal relationships synchronicities do also exist, explaining why Taurus the bull is by far the best-performing sign for stocks. Hulbert's archaic understanding of science would have been ok in the 17th century, but this is the 21st century.
(1) Lilith the Black Moon
The moon is revolving around earth in the form of an ellipse (no perfect circle). Every ellipse has 2 foci: one of them is earth, the other one is the Black Moon (Lilith) which is a theoretical point and no heavenly body that can be observed. Extending this line points to the apogee (approximately) the point on the lunar orbit with the largest distance from earth. The final syllable -gee is referring to gaia (earth), while -hel is referring to the sun. Since Lilith is a theoretical point different calculations for Lilith exist. In this article the mean Lilith is used, though the interpolated Lilith by Dieter Koch is quite similar (Link).
As with all other heavenly bodies and points, there is a mythological story behind - now this is the famous story with the rib J (http://en.wikipedia.org/wiki/Lilith):
Genesis 2:22 describes God's creation of Eve from Adam's rib [...] After God created Adam, who was alone, He said, 'It is not good for man to be alone.' He then created a woman for Adam, from the earth, as He had created Adam himself, and called her Lilith. Adam and Lilith immediately began to fight. She said, 'I will not lie below,' and he said, 'I will not lie beneath you, but only on top. For you are fit only to be in the bottom position, while I am to be the superior one.' Lilith responded, 'We are equal to each other inasmuch as we were both created from the earth.' But they would not listen to one another. When Lilith saw this, she pronounced the Ineffable Name and flew away into the air.
The description above already has a bearish or ‘negative' undertone. On the ISAR conference 2006 in Italy the financial astrologer Gracia Mirti gave a presentation on the importance of Lilith. According to Gracia, Lilith is strong in Scorpio (the sign of the bear), Capricorn, and Aries, all 3 signs ruled by the bear planets Mars and Saturn. In my experience Lilith's transits are bearish in the horoscope of a trader.
Every March and September something special happens: Lilith is in an aspect of the 12th harmonic to the lunar nodes (multiples of 30°). The lunar node has a revolution time of about 18 years (it makes some 20° each year), Lilith half of it, i.e. 9 years (40° each year). The chart below shows that the Dow Jones declines around 3 weeks before until 2 weeks after the aspects of the nodes and Lilith (chart created with the "Market Trader").
Interestingly, the biggest decline in the 1st half of the year is in March:
However, since the March decline is rather small compared to September, we need additional factors to be completely explain the September effect.
(2) Aphelion & perihelion
The 1st and 2nd law of the great astronomer and astrologer Johannes Kepler are:
1. The orbit of every planet is an ellipse with the sun at a focus.
2. A line joining a planet and the sun sweeps out equal areas during equal intervals of time. This implies that planets are faster when they are closer to the sun and slower when they are further from the sun.
Rafael Gil Brand writes in his „Textbook classical astrology" on page 63/64:
In classic astrology the aphelia were considered to be the zero-points of the revolution, i.e. as the starting point of these cycles.
In the aphelion a planet has the largest distance from the sun and thus the speed is lowest. Relative slowness marks the low, stocks are starting to rally when the planets are gaining speed. The thrilling fact is that the average aphelion of all planets is at 1° Scorpio, the sun is passing over that degree each year around 10/24 (+/- 1 day), which is exactly the low point in the Nasdaq chart.
The „Best Six Months Strategy" was mentioned the first time in the „Stock Trader's Almanac 1986": the months November through April are good, the months May through October bad. The Dow Jones gained 1950-2003 +10,175 points in the good half but lost -1910 points in the bad half (source: Almanac 2004, page 50).
The moon cycle is quite similar, the new moon is the beginning of the cycle, the time from new moon to full moon (cycle high) is the bullish half of the moon cycle as this chart shows: the vertical zero line is new moon, the Dow Jones is shown in the window +/- 15 days.
(3) geomagnetic storms
Let's summarize: Lilith explains the September weakness, the average aphelion explains the good and bad 6 months. There is still a 3rd factor, the geomagnetic storms, that explain the other seasonal effects, e.g. strength in December-January.
Geomagnetic storms on earth (caused by solar storms) have a large impact of human life as a research paper of the Fed Atlanta reveals (link):
They examine diurnal numbers of urgent hospitalization of patients in connection with suicides, mental disorders, myocardial infarction, defects of cerebrum vessels and arterial and venous diseases. Comparison of geomagnetic and medical data show that at least 75% of geomagnetic storms caused increase in hospitalization of patients with the above-mentioned diseases by 30-80% on average. Zakharov and Tyrnov (2001) document an adverse effect of solar activity not only on sick but also on healthy people: "It is commonly agreed that solar activity has adverse effects first of all on enfeebled and ill organisms. In our study we have traced that under conditions of nervous and emotional stresses (at work, in the street, and in cars) the effect may be larger for healthy people. The effect is most marked during the recovery phase of geomagnetic storms and accompanied by the inhibition of the central nervous system".
In a nutshell, people don't feel too well after geomagnetic storms due to its effect on the epiphysis and hypophysis. The stock markets perform quite bad in the 6 days after geomagnetic storms, that alone explains 0.8%-2.5% of the annual performance (up to 1/3). In the time 1932-2002 the influence of geomagnetic storms was present on 10% of all days.
The 3 most bullish months are January, July & December, it's no coincidence that these are also the 3 months with the smallest number of (bearish) geomagnetic storms. And the traditional crash month October is the month with the highest number of storms.