A Recipe for Caution: Why September is No Time to Take Risks in the Stock Market

As investors enter September, a month notorious for its brutal treatment of stocks, concerns about market performance are mounting. The question is whether this particular September is just another case of market déjà vu or if there are deeper structural issues at play.

Scott Rubner, head of equity and derivatives strategy at Citadel Securities, is sounding the alarm. In a recent client note, he outlined the risks facing investors as they enter this historically tough month. For Rubner, September’s troubles aren’t just a matter of market superstition; they’re rooted in a complex interplay of factors that make it an uninviting time to take on risk.

The changing landscape of earnings season is one key driver of Rubner’s caution. Historically, August has been the peak period for corporate profits, but this year’s crop of tech giants has already delivered stronger-than-expected results. While this might seem like good news, it actually serves as a reminder that the market’s upside momentum is faltering. As Rubner notes, “The upside catalysts are becoming less obvious just as the downside catalysts are becoming more numerous.”

The so-called “AI trade,” which had fueled fears of a tech sector correction, appears to be losing steam. With NVDA’s recent earnings report putting investors’ minds at ease, the volatility risk premium for tech stocks has been compressing. This reduced appetite for risk underscores the market’s shift towards caution.

Downside protection is looking increasingly cheap, with options prices at their lowest point of the year. Investors are being offered a low price to buy insurance against potential losses. However, this isn’t just about hedging bets; it’s about recognizing that the market has entered a period of heightened uncertainty.

September’s troubles extend beyond corporate profits and volatility metrics. Retail traders have historically been hesitant to invest during this month, with average buying activity on down days tracking at roughly half its usual level since 2019. Corporate buyback activity is also poised to slow as we enter September, thanks in part to the accelerating blackout period for buybacks around Sep. 12.

This shift in market dynamics speaks to a broader recognition that investors are being asked to pay relatively little premium for protection. For those who still believe that September is just another case of market jitters, Rubner’s analysis offers a sobering reminder of the complexities at play. This isn’t about timing the market or making bold predictions; it’s about recognizing that, right now, the risk-reward calculus looks decidedly unfavorable.

As investors navigate this tricky terrain, they’d do well to take a page from the corporate playbook – and exercise a healthy dose of caution.