Nick’s Note: Regular readers know I like to pull back the curtain to show you what’s really going on in the markets. That’s why, today, I’m turning the reins over to my colleague Jeff Clark.

Jeff is a master option trader. And he says blindly following Wall Street seasonal patterns (like “sell in May and go away”) can ruin your portfolio. With the next season change due in a few weeks, I suggest you read Jeff’s timely essay below.

By Jeff Clark, editor, Market Minute

One by one, many well-known Wall Street clichés are dying.

Whatever happened to “Sell in May and go away“? That saying warns investors that the market is entering the worst six months of the year. The idea is to get out of stocks in May, then come back in November when prices are cheaper.

But that hasn’t worked this year… at least, not yet. The stock market is higher over the last five months. The S&P 500 has gained over 5%.

Another well-known saying is “Sell on Rosh Hashanah and buy on Yom Kippur.” That 10-day period between the Jewish holidays tends to be rough for the stock market.

That hasn’t worked this year, either. On Friday, just before Yom Kippur, the S&P 500 closed at a new all-time high.

Finally… What about the old “Don’t fight the Fed” philosophy?

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The thinking here is that when the Federal Open Market Committee (FOMC) is lowering rates, creating money out of thin air, and actively buying financial assets—like Treasury bonds and mortgage-backed securities—investors should be long the stock market. There’s so much money sloshing around that a bunch of it is going to find its way into stocks and the market will press higher.

But the Fed started a tightening cycle back in December 2015—when it raised interest rates for the first time since 2006. The Fed has raised rates four times since then. And, just last month, the Fed explained its plan to shrink its balance sheet—which is a form of quantitative tightening.

If easing is good for stocks, then tightening should be bad. Investors who wish to not “fight the Fed” should be selling stocks in this situation.

They’re not.

So, as all of these clichés—which refer to the seasonal patterns of the stock market—start to fail, I’m starting to get concerned.

You see, my favorite seasonal pattern—the Santa Claus Rally—is due up in just a few weeks. But what if Santa doesn’t show up?

It’s the traditional stock market weakness in September and October that creates the setup for a year-end rally in November and December.

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We’ve seen this happen time and time again. Stocks drop in September and October. Investors get scared, and the Volatility Index spikes higher. The various technical indicators on all the major indexes plummet into deeply oversold territory. And investors who prepare for it can swoop in and pick up bargains just in time for the rally that propels stocks higher into the end of the year.

In that sort of environment, it’s possible to make a year’s worth of returns in just a few weeks.

But we haven’t seen the traditional weakness yet. So, I’m wondering whether we’ll get the traditional rally.

Maybe this is the year in which we can truly say, “This time is different.”

Then again… maybe it’s not different, it’s just delayed.

We are now entering October. For Santa’s sake, I’m hoping for a decline. We’ll just have to wait and see how the month plays out.

Best regards and good trading,

Jeff Clark
Editor, Market Minute

P.S. My free Market Minute newsletter tells readers where the action is headed every trading day… including which sectors to watch and which to avoid. And it’s easy to join. You can sign up with just one click.

Click right here to subscribe to the Market Minute, and you’ll receive your next issue on Monday at 7:30 a.m. ET.

CHART WATCH

Banks Are Flying Higher

Banks have hit new 52-week highs…

Regular readers know that we’ve been bullish on banks all year. And there are still many reasons to own financials.

In February, we told you that reduced regulations would increase profitability and drive prices higher. In May, we saw big hedge funds loading up on banks. And in June, the Fed gave the entire sector a “clean bill of health.”

All of this pushed bank stocks higher.

The Financial Select Sector SPDR ETF (XLF) tracks bank stocks. It just broke out to new highs in late September…

With all these tailwinds behind banks, this run is just getting started. Banks can still be bought on the breakout.

—Nick Rokke

IN CASE YOU MISSED IT…

California is the “greenest” state in the country… But it’s about to go dark.

Now the state needs a $2.1 billion energy bailout… and you can get paid handsomely from it. Learn more here…