STP Algo Trader - Market Insights

When we began our investing career, we had never really heard of "seasonality."

No one at The Wharton School ever taught the idea that stock prices – both the overall stock market and individual stocks – might show patterns based on the calendar.

In fact, the very concept would be ridiculed!

It went against the entire orthodoxy of academia.

Not that the professors necessarily believed in the "efficient markets hypothesis" or anything, but they certainly believed in the role of economics and fundamentals in stock prices.

How could a time of the year possibly play ANY role?

Well, after three decades as a professional investor, I can tell you they are DEAD WRONG.

Seasonality can play a huge role in how stocks trade.

The key is not to think of the patterns as certainty but as possibility. We don't know exactly what will happen in the future, but seasonality can be one of the inputs that help us pick our spots of when to make a bet.

As we were looking at the technical indicators for today's overall stock market, we thought to ourselves how similar THIS market looks to last year.

On July 15, 2024, we published a note in our HX Daily publication titled "Take Your Profits! A Tactical Trading Call."

That call ended up being exactly right. In fact, the S&P 500 peaked the NEXT day.

This was before a treacherous sell-off in August that scared many market participants.

The situations are SO similar that we will share our note from last year along with some updated charts.

Here is the note, and here is the same call for our readers – Take Your Profits!

Take Your Profits!

A Tactical Trading Call

(Originally published July 15, 2024, in HX Daily)

Most stock market analysts don't like making overall stock market calls in the short or long term.

We think they are wrong. There ARE calls that can be made that are highly probable.

The long-term call is the easy one. Over the long term, the stock market goes up. Over decades the data is irrefutable.

Ben Carlson of A Wealth of Common Sense is one of our favorite authors. Here is a chart from his firm, Ritholtz Asset Management.

Since 1950, if you take holding periods of longer than a decade and own the S&P 500, you have a 100% hit rate. The evidence is irrefutable.

In the short term, however, the data is much different. Here is another chart from him…

This shows that the stock market from day to day is a coin flip or slightly better.

It is difficult to make short-term high probability calls.

We think this is true most of the time, but there are a few times when the probabilities change.

Back on March 21, we made a call that we thought the stock market needed to take a break. You can read that note here.

Here is a chart of the S&P 500 from the start of the year…

(Editor’s note: Above is a chart updated AFTER the publication of our note.)

We put a red arrow on the date that we made our call.

Our view at the time was that the stock market had a great start to the year, but many macroeconomic factors were going the other way. Interest rates and commodity prices had begun moving higher.

We also thought it would be impossible for the stock market to keep up that pace of return.

Turns out that we were correct, and across the next month or so, the S&P 500 corrected a little more than 5%.

We are now making a similar call. We think that it is time to take profits on trading positions.

We think it is highly likely that in the coming weeks, we will enter a correction that could last weeks or months.

We think it could be similar in magnitude to the last one.

If the S&P 500 were to retrace back to the 50-day moving average, it would be down -4.5% and to the 100-day moving average would be -6.6%. We think this correction will be in the -5% to -10% range and last six to eight weeks.

(Editor's note: TODAY (July 8,2025) the numbers would be -5.1% and -7.1% to the 50-day and 100-day moving averages, respectively. Almost identical!)

What gives us this conviction?

Our first data point is looking at our favorite technical indicator – the relative strength index or “RSI.”

Regular readers are familiar with this metric, but it measures the short-term velocity of the price of an asset. It can be seen as a measure of "overbought" or "oversold" and a contrarian indicator. Usually, overbought is considered any reading over 70, and oversold is any reading under 30.

We included the chart of the RSI of the S&P 500 below the price chart above.

We consider it a strong oversold contrarian indicator and use it as the base for our TRADING strategies.

As an overbought contrarian strategy, however, it is not useful unless it gets extremely high, usually over at least 80.

(Editor’s note: The S&P 500 hit a one-year high RSI of 76 last Thursday. Not quite at 80 but in the top decile.)

For major stock indices and commodities, reaching that level is quite rare. Well, the S&P 500 just did it last week. This has only happened 12 times since 1985.

Here is a table showing what has happened next after the S&P 500 reaches at least a level of 81 during that period…

In the next two trading weeks, the data looks pretty similar to any other stock market period.

Across three and four weeks, however, the data is ugly. The three-week data is particularly bad. Looking across all three-week rolling periods in the history of the S&P 500, a 17% positive hit rate is rare.

Does this mean the stock market is guaranteed to go down?

Not at all! The last time the S&P 500 went through an RSI of 81 back in December of 2023 the market was higher in three and four weeks.

Also, most of these losses are not that bad.

There is one other piece of data that we are looking at, though: seasonality.

Many folks ignore it, but we don’t.

Seasonal patterns happen because of the seasonality of our lives. Here is the table showing the returns of the stock market by month…

This data is for the Dow Jones Industrial Average, but the same seasonality applies to the S&P 500.

You can see that while July is a great month, which is playing out again in 2024, August and September can be rough. They average some of the lowest returns and hit rates, especially in September.

Why does this happen?

We think there are particularly good reasons. Over August, many (most) investors are on vacation and simply not paying as much attention.

When we get to September, any companies that were going to miss their numbers for the full year now can no longer avoid the situation. There is not enough time to make up for it.

The combination of bad news and the surprise of investors returning from vacation creates a challenging stock market.

Can it be that simple?

We can’t know for sure, but we do feel confident that taking profits on your trading positions right now is a good move.

As a trader, you would rather sell early than late. We encourage you to do so now.