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August Gains, But September Looms

Sure the market has continued its summer rally, with the Dow and S&P up over another 3% each month-to-date. This of course, comes on the heels of 7% gains in July. But how long can the rally last without a pullback?

As volume begins to rise in the fall, and many come back from summer vacations, investors will look at the underlying market and economic data with a critical eye. "We've rallied big on very light volume," Joe Kinahan, strategist of Thinkorswim, told CNBC."

We are just over a week from the start of September. Historically, September is the worst month on average for the markets. On average, the S&P and Dow have lost 1.3% and 1.2% respectively in the final month of the third quarter. Looking at daily averages going back to 1896, the Dow has lost ground nearly three out of every four days in September (see chart below). The ratio gets worse in the back half of the month. After an up August, the averages for September get worse as well.

With the surge we have seen, many analysts are looking for some correction before the bull rally can continue and recommending some defensive plays. Others believe the worst is past and the market is reflecting the emergence from recession. Either way, enjoy the rest of the summer because September should be interesting.

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