There is a constant debate that goes around the investing community with both local and global markets during the ninth month.
It's called the ‘September Effect'.
It's a well-known theory where prices perform worse, on average, compared to the performance for the rest of the year.
In fact, over the last 100 years, September has been known for the worst performing month in America.
If you take the previous 94 Septembers price movements, the Dow Jones has lost on average 0.7% and the S&P500 has lost around 0.5%.
We aren't exactly sure why it happens, but we have some speculations.
In this article, I'll share the reasons why the ‘September Effect' occurs and why this month we could actually end up negative on the JSE.
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Four possible reasons for the ‘September Effect’
Reason #1: The final quarter of company earnings are released
When September comes, it means one thing financially.
We’re in the final quarter of the year. This is where investors become worried about the upcoming third-quarter earnings as the summer sales are coming to an end.
Instead of buying stocks and other financial markets, they instead decide to hold onto their cash which leads to a drop in stock prices.
NOTE: With the JSE, I think this year is a big exception. I believe local investors are also going to slow down with their buying as we have just come out of two months of better earnings since the beginning of lock down.
And as businesses are opening and trading once again, there is still fear and uncertainty of a second wave of COVID-19 still to come.
And with no vaccinations available nor working, this will continue to put pressure in the confidence for businesses.
And so, I believe investors will also ease off the buying in September.
Reason #2: Investors are cashing up to pay their dues
As I mentioned, many US and European investors are coming back from their summer holiday. And instead of piling their money back into the markets, they’re locking in their gains as well as their tax losses before the year ends.
This is to pay their duties such as children’s’ school fees, properties and other yearly obligations.
Reason #3: Big companies are also cashing up
Not only are private investors closing their positions, but also so are many mutual and hedge funds who are cashing in their holdings to harvest their tax losses.
Reason #4: Self-fulfilling prophecy
As you may have heard of the January Effect, Santa Clause Rally, Sell in May and go away and the October Effect –traders are simply reacting to the current environment action that always takes place at this time of year.
NOTE: Remember, the American stock markets are leading indices. So, when America falls, we tend to follow their movements.
But now let’s see what the charts say…
You may never see value on the stockmarket quite like this ever again!
Right now, there are a handful of little known stocks at the most attractive levels they've been in a decade:
• A Precious metals producer that's turning mine dumps into money - and it's just signed a deal to get its hands on a 150 million tonne copper opportunity in Africa
• A Pharmaceutical and healthcare company that's capturing the entire value chain from medicine and PPE to medical aids, and health insurance - and even though you've probably never heard of it - it serves more clients than Discovery Health!
• A niche manufacturing company that's literally DOUBLED its footprint in Europe over the last couple of years - and now its expanded with another offshore acquisition
• An essential logistics provider that's paying one of the largest dividends on the JSE - whilst still growing its business year on year.
• An up and coming transport company that's making big money from government's failures in the public transport space
I’ve identified these 5 local companies I believe could double in share price or even more over the next 24 months! You can learn more here.
Why we could experience a red September
The last price bar (red bar), is telling me three reasons why we could have downside from here:
1. It has broken the most recent uptrend (Blue line)
2. The price has made a lower high (signalling downside to come).
3. The last month’s shows selling pressure (confirming today’s factors).
And so yes, it looks like we could see downside this month (and dare I say the rest of the year).
But we’ll save that for another article.
Analyst, Red Hot Storm Trader