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Here comes a stock market 'washout': strategist

Brian Sozzi
·3-min read

The bulls won’t want to hear this, but the market could have a date soon for a good old-fashioned washout.

Market volatility has returned in earnest this month. Pick your poison on the drivers as there are many. There is the 27% crash in the once red-hot stock of Tesla on fresh fears of overvaluation. In turn, those concerns have spilled over into selloffs for other 2020 runaway stocks such as Apple, Amazon, Netflix, Nikola and Advanced Micro Devices.

Then there are lawmakers totally flubbing the next fiscal response to the COVID-19 pandemic. Indeed that will bring risk to headline macroeconomic data later this month and into October. The market has to price that in. And last but not least — and no less important — is a November presidential election that may not be decided on Election Day.

Like we said, pick your poison.

For market veterans like Prudential Financial Chief markets strategist Quincy Krosby, the message from the latest bout of market weakness is clear. Brace yourself, a warranted plunge that shakes out the froth in stocks could be nearing before September ends.

“The unwinding will probably continue and ultimately, we will get to a washout. We’ll get to oversold conditions and there will be kind of an all clear. In terms of the calendar, this is a dicey period for the market. We have about three more weeks of it in terms of statistical difficulty in the markets. A consolidation is not fun, but the point is that as the market becomes increasingly oversold you are going to see buyers coming in and taking their positions and taking them to the yearend,” Krosby told Yahoo Finance’s The First Trade.

Share traders react on share price development on the trading floor of the Frankfurt stock exchange, October 8, 2008.  European shares plunged more than 7 percent to five-year lows in morning trade on Wednesday, with the deepening financial crisis sending jitters into the market that sector rescue packages failed to calm.       REUTERS/Kai Pfaffenbach(GERMANY)
"In terms of the calendar, this is a dicey period for the market," says one strategist. REUTERS/Kai Pfaffenbach(GERMANY)

To Krosby’s point, stocks historically don’t perform well in September.

September has been the worst-performing month for markets, on average, since 1950, according to LPL Financial. The S&P 500 has dropped about 1% on average in the month of September since 1950, LPL Financial data shows. The only other month to notch a drop on average (and a minuscule one at that) going back to 1950 is August.

This month could be weaker than the averages because of the election. LPL Financial data reveals that the S&P 500 has shed 0.2% on average in an election year.

Investors seemed to have forgotten all of these nuances in their desire to ride the summer momentum in markets. They are likely to be reminded that stocks don’t always go up — and could fall sharply and quickly — very soon.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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