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... probably the first week of October (upper part of the posting) and the remainder of the year (lower part of the posting) as well.

Wayne Whaley, CTA of Witter & Lester Inc. and 2010 Charles H. Dow Award winner,and Rennie Young from MarketTells (highly recommended) - hats off to both - presented a very interesting and telling study concerning the positive short-term (1-week time frame) implications in the event the S&P 500 wrote better than a 7.5% monthly gain in the past.

While Wayne Whaley showed the last 11 and Rennie Young all occurrences since 1950, I extended the time frame back to 1930 and did not only look at the level where the S&P 500 was trading exactly 5 sessions (or 1 week) later, but examined the days in between as well.

Table I below shows the S&P 500's historical performance (since 01/01/1930) over the course of the then following 1, 2, 3, 4, and 5 sessions in the event the S&P 500 was up better than 7.5% month-to-date on close of the final session of the month.

(* no close below trigger day's close during next 5 sessions)

Out of 53 occurrences, the S&P 500 closed higher (above the close on the last session of September) the next day (in this event on Monday, October 1, which already was an up-day for the S&P 500) on 29 occurrences (or 54.72% of the time), 2 days later on 32 occurrences (or 60.38% of the time), 3 days later on 41 occurrences (or 77.36% of the time) - and on only 1 out of the last 30 occurrences lower more than -1.0% -, 4 days later on 41 occurrences (or 77.36% of the time) - thereof on all of the last 11 occurrences -, and 5 sessions later on 40 occurrences (or 75.47% of the time) - thereof on 12 out of the last 13 occurrences -, significantly better than the S&P 500's at-any-time (random) chance of 55.23% for closing higher 1 week later.

In addition: Out of those 53 occurrences, the S&P 500 never looked back and did not post a single close below the trigger day's close (the month-end close) during the next 5 sessions on 20 occurrences (or 37.75% of the time), better than the at-any-time (random) chance of 29.71% for not posting a close below the trigger day's close over the course of the then following 5 sessions.

And historically downside potential was limited as well: The S&P 500 was trading lower -1.0% or more 5 sessions (1 week) later on only 7 out of those 53 occurrences (or 13.21% of the time), in comparison to the S&P 500's at-any-time chance of 26.64% for trading lower -1.0% or more at the end of the then following week.

But in order to check for the intermediate- and long-term implications of such extraordinary monthly gains as well, and due to the fact that up to now there were only 2 other occurrences since 1930 (1939 and 1954) where the S&P 500 closed out the month with better than a 7.5% gain in September, I examinded those occurrences where the S&P 500 was up year-to-date at the end of September vs. those occurrences where it was down year-to-date (the S&P 500 was up 2.34% year-to-date at the end of September 2010).

Table II below shows the S&P 500's historical probability (since 01/01/1930) of posting at least 1 higher | lower close over the course of the then following 1 up to 63 sessions (approxim. 3 month), and trading (closing) higher exactly x sessions later in the event the S&P 500 was up year-to-date at the end of September ('up YtD') and down year-to-date ('down YtD').

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Interestingly, the 'S&P 500 up year-to-date at the end of September' setup not only outperforms the 'S&P 500 down year-to-date at the end of September' setup on every single day over the course of the then following 3 month (means it's probability for posting a higher close exactly x sessions later always outnumbers its respective counterpart's probability for posting a higher close exactly x sessions later), the S&P 500's year-to-date performance at the end of September seems to be highly indicative for the S&P 500's performance over the remainder of the year as well.

In the event the S&P 500 was up year-to-date at the end of September, the S&P 500 closed at a higher level 63 sessions (approx. 3 month) later (year-end) on 40 out of 49 occurrences (or 81.63% of the time), while being down year-to-date at the end of September the index closed at a higher level 63 sessions (approx. 3 month) later on only 15 out of 29 occurrences (or 51.72% of the time), the former significantly higher and the latter significantly lower than the respective at-any-time probability of 61.01% for posting a higher close exactly 63 sessions later.

Table III below now shows the S&P 500's historical performance (since 01/01/1930) over the course of the then following 5 (1 week), 21 (approx. 1 month), 42 (approx. 2 month) and 63 (approx. 3 month) sessions in the event the S&P 500 was up year-to-date at the end of September.

(* no close below trigger day's close during next 3 month)

The S&P 500 was trading higher 2 month later on 12 out of the last 13 occurrences, and 3 month later on 15 out of the last 16 occurrences. And on 44 out of 49 occurrences, the S&P 500 posted a close above September's close at least once at the end (the last session) of October, November or December. In addition: Out of those 49 occurrences, the S&P 500 never looked back and did not post a single close below the trigger day's close (in this event September's month-end close) over the course of the then following 3 month on 9 occurrences (or 18.37% of the time), (significantly) better than the at-any-time (random) chance of 9.23% for not posting a close below the trigger day's close over the course of the then following 3 month.

Table IV below now shows the S&P 500's historical performance (since 01/01/1930) over the course of the then following 5 (1 week), 21 (approx. 1 month), 42 (approx. 2 month) and 63 (approx. 3 month) sessions in the event the S&P 500 was down year-to-date at the end of September.

(* no close below trigger day's close during next 3 month)

Already being down year-to-date at the end of September, the S&P 500 lost an additional -10.0% or more during the then following 3 month on 7 out of those 29 occurrences (or on 1 out of every 4 sessions). Good to know that we currently missed being down for the year at the end of September, even if it was by a hairbreadth only (up 2.34%).

Conclusions:

Historically, everything seems to be in place for (means probabilities and odds are significantly tilt in favor of) a year-end rally. The fact that in September the S&P 500 wrote better than a 7.5% handsome monthly gain, and the S&P 500 being up year-to-date on the end of September are (highly) indicative for a continuation of the recent run-up in the markets, and historically downside potential was regularly limited over the remainder of the year (except 1943, 1978 and especially 1987).

Successful trading,