Market Overview

4 Reasons Why the Market Could Sell-Off This Fall


SPY: 4 Reasons Why the Market Could Sell-Off This Fall




As the market continues moving higher, increasingly more investors are becoming nervous. Some of you have missed the rally completely, while others are unsure and confused about what to do now.

At this point, I would certainly recommend taking some profits and raising cash ahead of what I see as several factors that could cause the stock market to selloff significantly this fall.

Calling a market top or bottom is impossible, but what we're trying to do here at is provide information that can help you adjust your asset allocation strategy so that your portfolio is properly positioned to take advantage of the market.

This means that, generally speaking, you want to buy an investment when others are selling and take profits when others are buying.

Here are five reasons that I’m worried that the stock market could be hit with a considerable sell-off this fall.

1)      September is the Worst Month for the Stock Market

This should be no secret to long-term investors. According to the Stock Trader's Almanac, the average return for the S&P 500 is –0.52% during the month of September, since 1971.

This is by far the worst month for the stock market, and this alone should have you slightly concerned considering how high the current stock market is.

Seasonality is difficult to explain in one overriding generality. Meaning, while every year there might be a different reason for weakness, the comment trait is that September seems to be far weaker than any other month.


2)      Federal Reserve will Most Likely Change Monetary Policy

I believe that the Federal Reserve will begin to reduce their $85 billion per month asset purchase program this fall, with my estimate that the announcement will come during the September meeting.

While some investors believe that the market has already priced in this action, I believe there will be far greater volatility than most people expect. We are looking at the beginning of a significant change in monetary policy.

In my opinion, professional investors won't simply incorporate one month’s worth of reduction, but will extrapolate out 12-16 months, causing many large institutions to take profits and create selling pressure.

3)      Budget Debate

Yes, it's that time again, the budget debate. We have not solved our federal budget issues, nor are we likely to. It seems that every time politicians in Washington take center stage, the attention focuses on their pathetic leadership ability, and investors occasionally panic and sell.

While I don't know the final outcome anymore than you do, I am worried whenever I have to rely on politicians to make decisions. In either case, having more political rhetoric on TV is a negative, not a positive for the markets.

4)      Revenues are Flat, Earnings Growth Appears to be Stagnating

Looking at this past financial reporting season, it's apparent that revenues are generally flat. Companies are having a difficult time in increasing topline revenue growth. While earnings growth is still positive, this to appears to be stagnating.

Much of the earnings growth over the past few years has come from cost cutting. At some point, you've cut all the costs possible and now need to increase revenue. We are simply not seeing that occur.


This is the S&P 500 SPDRs (NYSE: SPY), and what is clear in this chart is that over the past six months there has only been one minor pullback. To me, considering all the facts above, there only seems to be small upside potential with significant risks to the downside.

I also pay attention to see how far the market is above its 200-day moving average. The last time the market was this far above its 200 day moving average was during the spring of 2012. The S&P 500 followed this move up with a sell-off during the summer of 2012.

The market still had room to grow at the point since companies were able to continue cutting costs and the Federal Reserve kept adding liquidity. Both of these factors are coming to an end.

All of these variables does not guarantee that the stock market will sell-off, but are points of interest that I'm following closely. I always try to calculate the upside potential versus the risks to an investment, and at this point when I weigh the positives for the market versus the potential negatives, the scale seems to be tipping toward the side of raising cash and moving to the sidelines.

If you would like to know how we would create a trading strategy for SPY and other ETF's, then check out the ETF Total Return Newsletter. Or we can teach you in a one-on-one coaching session how to create the ideal risk reward trade for this ETF.

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Read more articles on the Education Page and Market Analysis Blog.

By Joel Laceda - August 13, 2013

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Markets Trading Ideas


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