The S&P 500 (SPX) gained 3.5% in September, defying historical seasonality, yet faces persistent concerns over high valuations, record money market inflows totaling $7.7 trillion, and potential October weakness. Despite these headwinds and short-term risks like aggressive call buying and record VIX short positions, contrarian indicators such as multi-year high short interest and significant outflows from domestic equity funds suggest a lack of market euphoria, supporting a bullish intermediate-to-longer-term outlook. Investors are advised to monitor the SPX's 30-day moving average and the 6,760 level for signs of a momentum shift.
September is in the books, and the S&P 500 Index (SPX - 6,715.79) notched an impressive 3.5% gain, throwing a wrench in the negative historical September seasonality warnings that were prominent in financial and social media. October, which is the third worst month historically, brings fresh caution from those grounded in seasonality analysis. Even with September behind us, a multitude of other concerns remain. For example, the SPX arguably faced an additional headwind last month, after Federal Reserve Chairman Jerome Powell shared a view with many other investors, saying that “equity prices are fairly highly valued.” “U.S. investors are sitting on a pile of cash…Assets in money-market funds reached a record $7.7 trillion last week, with more than $60 billion flowing into those funds during the first four days of the month…With stocks by some measures now more expensive than ever, some investors are willing to wait for discounts…” - The Wall Street Journal, September 20, 2025 Powell isn’t the only one factoring in high valuations, as seen in the excerpt above from a Wall Street Journal article from a few weeks ago. In addition to valuation concerns, other worries are piling up, as seen in another article from the newspaper that summed up those fears. “...some on Wall Street worried the 2025 rally could be on borrowed time…gains have gone so far that some investors… are beginning to worry it is too much of a good thing. October is traditionally a tough month for stocks, and many investors see signs of overheating—from surging speculation on meme stocks to stretched corporate valuations—that could portend a pullback… Adding to investor concerns, some warn that President Trump’s tariffs will eventually fuel a rebound in inflation, potentially derailing the Fed’s rate cuts and ramping up pressure on American consumers.” - The Wall Street Journal, September 30, 2025 Euphoria warnings have been voiced since early August, when the SPX was trading around 6,350, which is roughly 5% below its current level. But there are quantified measures of sentiment that suggest sentiment is not as euphoric as some have proclaimed for months. “Total short interest on index components has displayed anything but euphoria. In fact, multi-year highs -- or all-time highs in index component short interest -- have been a bullish underpinning from a contrarian’s perspective since the indices have been in a strong long-term technical backdrop… As such, it should be noted that the Russell 2000 Index (RUT--2,448.77) closed above its previous all-time closing highs from 2021 and 2024 on Thursday, only to close back below these closing highs on Friday.” - Monday Morning Outlook, September 22, 2025 I recently discussed one such measure of sentiment, with respect to short interest on the SPX and Russell 2000 Index (RUT - 2,476.18) components being at multi-year and all-time highs, respectively. Additionally, outflows from domestic equity mutual funds and exchange-traded funds are notable. This could send investors into money-market funds, or overseas stocks to play a weaker dollar. Regardless, the market has marched higher amid huge outflows that are far from signaling euphoria. With stocks in new high territory amid massive outflows from domestic mutual funds and exchange-traded funds, amid a long, steady build in short interest, I continue to believe this supports a bullish intermediate and longer-term narrative, which has been in place since early 2024. If you are a short-term investor or trader, keep in mind that momentum can persist longer than most market participants think. Therefore, keep your bullish stance for now, unless and until you see evidence of the upward momentum waning. If you read my commentary from week to week, you know that I have been focusing on the SPX’s 30-day moving average to quantify the current momentum higher. If the SPX closes significantly below its 30-day trendline, that will not necessarily trigger a correction, but it will raise the probability that momentum from the spring bottom could be slowing. Worst case, it could signal the start of a correction. Pullbacks have been supported by this unpopular but important moving average since the SPX crossed above it in late April, which is why I am keying to it. “The next potential pause or short-term inflection point to watch for is 6,760, which is roughly 10% above the previous all-time closing high in February…as they anchor to the 10% profits they have realized after buying the breakout…Regardless, whether we get to 6,760 in the coming days, continue to key to the SPX’s 30-day moving average for clues that the momentum could be slowing and/or reversing.” - Monday Morning Outlook, September 22, 2025 The SPX has now rallied nearly 10% since the breakout above its prior all-time closing high in February. Momentum higher is still in play, with the SPX about 1% above the important and rising 30-day trendline. But as I mentioned two weeks ago, the 6,760 level could be the next logical place where hesitation occurs, just as the SPX stalled in the 6,470 area, or 10% above the 2024 close, in August and early September. A short-term hesitation or pivot lower from this level would not be a huge surprise, with option buyers on SPX component stocks buying calls relative to puts at a rate that has historically preceded market weakness. Additionally, the net short position among large speculators on CBOE Volatility Index (VIX - 16.65) is the largest since August 2022, which preceded a 10% decline in the SPX into early October of that year. A caveat to this optimism (a short position on volatility is effectively a bullish view on stocks) is that short positions on VIX futures might be more justified at present, with the SPX at an all-time high. This could be considered a short-term risk factor. In August 2022, the SPX’s technical backdrop was not nearly as strong, as the index was trading below both its one-year and two-year moving averages, even after a rally from June 2022 trough. Continue to stay in tune with short-term risk factors but acknowledge that price action is ultimately what matters. Right now, the optimism among traders is not misplaced. Risk factors are meant to prepare you to act if the short-term technical backdrop suddenly deteriorates, sparking the need for a hedge or more bearish plays. Continue Reading: The S&P 500 index posted a strong 3.5% gain in September, defying negative historical seasonality, but now faces a confluence of cautionary signals. Headwinds include high equity valuations, as noted by Fed Chairman Jerome Powell, and signs of market overheating, such as surging speculation in meme stocks. Investor caution is further evidenced by a record $7.7 trillion held in money-market funds. However, countervailing data suggests a lack of broad market euphoria, providing a bullish underpinning from a contrarian perspective. Key among these are multi-year highs in short interest on SPX components and all-time highs for Russell 2000 components, coupled with significant outflows from domestic equity funds. The market's upward momentum currently remains intact, with the SPX trading above its 30-day moving average, a critical support level. Near-term risk factors warrant attention, including a high ratio of call-to-put buying on SPX components and a record net short position by speculators on the CBOE Volatility Index (VIX), a condition that preceded a 10% market decline in August 2022. The next technical level to watch is SPX 6,760, which could serve as a short-term inflection point for profit-taking.
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