We are on track for the worst September since 2002, when the market sank 11% for the month. That’s according to a Marketwatch article published today. But there’s a problem with this scare-mongering article – it may not come to pass. Here are the hard numbers:

  • From the last peak of 3580.84 on the S&P 500, the market is down by 8.4%. It takes a decline of 10% to qualify as a proper correction. We’re not there yet.
  • For the current month of September 2020, the market is down by 6.3%. That puts it at the 5th worst showing for a September since 2002.
  • And it ranks 18th worst on the list of all 216 months since 2002.

The September rout is all about Energy

Here is the list of the 11 sectors of the S&P 500 index, ranked in order of their September 2020 returns from lowest to highest. Energy is down the most, followed by Tech. Materials performed the best.

Notice that Energy is also the worst-performing sector year to date. Technology is second-worst in September, but still the year-to-date leader.

Possible explanations for the drop in Energy stocks

  • Demand for energy is low and getting lower as summer ends
  • Most of the Energy names on these lists are carbon-based.
  • Clean Energy is the wave of the future.
  • Natural Gas prices crested on August 27th and have since been in decline.
  • Crude oil prices topped out at about the same time.
  • Offshore rig counts were rising but have since begun to decline again.
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Will the dip-buyers return to save the day?

The chart below shows that the intrepid dip-buyers have only allowed three declines of 5% or greater since the recent bottom in March 2020. Will they show up once again? They tried and failed on September 9, 11, 14, and 15.

But don’t underestimate the dip-buyers. Mostly retail types, they have been in control of this market since March 23rd. They have the Powell Fed on their side. And there seems to be no limit to the amount of risk they are willing to take, including options and leverage.

Probabilities for what comes next

I do a lot of work with probabilities. Here are a few observations I’ve made, based on today’s decline and the historical record of what has happened after similar events. I use Bayesian conditional probabilities to arrive at these numbers.

There is a…

  • 62% chance tomorrow will be an up day.
  • 69% chance the market will be 10% lower than where it closed today, sometime in the next 3 months.
  • 58% chance it will be 15% lower within the next 6 months.
  • 32% chance it will be 15% higher than today at the end of the next 12 months.

As Benjamin Graham said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” Since the recent bottom on March 23rd, investors have been voting for a speedy recovery and a return to normal. Today’s action marks the beginning of the weighing machine market.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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