The equity market is facing a potential risk of weaker seasonality in September as the historically strong period from June to August comes to a close, Bank of America highlighted on Monday.
From June to August, as of August 23, the market has risen 6.8%, compared to average returns of 3.2% for all years and 7.3% for Presidential election years.
Meanwhile, September is noted for having the weakest seasonality of the year, with the S&P 500 (SPX) posting gains only 44% of the time, and an average return of -1.20%.
In Presidential election years, September and October returns are similarly lackluster, BofA notes, averaging -0.46% and -0.34%, respectively, although “this tends to precede a post-election rally into year-end.”
The bank’s technical strategists continue to use the broad-based NYSE and NASDAQ Composites as key "Dow Theory" indices to gauge the health of the cyclical bull market that began in late 2022.
Both indices made higher highs, offering bullish confirmation into early July. However, while the NYSE reached another new high last week, the NASDAQ did not.
“This sets up an early July into late August bearish non-confirmation just ahead of a weaker seasonality for the US equity market,” strategists wrote.
They also note that bearish upside exhaustion signals from daily indicators Demark 9s and 13s across several indices, including the SPX, S&P 500 equal weight (RSP), NYSE Composite (NYA), NASDAQ 100 (NDX), NASDAQ Composite (CCMP), and Dow Jones Industrial Average (INDU), indicate a tactical risk that could reinforce weaker U.S. equity market seasonality in September and October.
“In summary, the signals on the SPX, NDX and NASDAQ are still firmly in place, but they are at risk on the NYA and RSP given new all-time highs for those indices,” strategists pointed out.
Moreover, Bank of America highlights bearish daily Demark upside exhaustion signals on August 21 and 22, aligning with a bearish engulfing pattern on the S&P 500 just below the July peak at 5670.
These signals are strong below Demark resistance at 5708, but a break of tactical support near 5560 is needed to confirm the bearish pattern. If 5560 holds and the SPX overcomes these bearish signals, it could pave the way for a move toward 6000, strategists said.