Inside Markets — Seasonal Weakness Explained

Our bullish pain trade scenario will end as the corporate buyback window begins to close in mid-September. Historically, the month-long period between mid-September and mid-October is usually the weakest of the year. In our opinion, the seasonal weakness is largely the result of increased focus on year-ahead estimates as management teams recalibrate initial forecasts that tend to be overly optimistic. Nowadays, that recalibration happens during sell-side industry conference season that starts during the second week of September.

The SPX remains just below its all-time high of 5667 set on July 16. A sustained close above that level during a period of vacation-induced illiquidity is part of the bullish pain trade scenario we outlined three weeks ago. Failure to set a new high during this narrow window would likely trigger bearish trend deceleration and momentum divergence signals at a time when major indices are overbought. Our SPX target for the bullish pain trade (FOMO rally) sits at ~5745, which is +2.5% above current levels.

US equity markets will remain well supported as long as economic growth remains resilient and the Fed’s policy path is lower. Rate cuts in response to a growth scare is not a bullish recipe for richly valued equity markets. At this point, it’s all about labor markets with equities especially sensitive to a rising Unemployment Rate.