I've been punched in the face a lot in my life.

I gotta say, it sucked every time. But my world didn't end either.

That's how the market feels right now. Euphoria is coming… but we're all about to get punched in the face first.

Last month, I showed you how the stock market is sprinting toward a full-on feeding frenzy. Conditions are perfect for a melt-up in its purest form: a generational move not seen since the final phase of the 1990s dot-com boom.

Don’t get me wrong, I still believe this mega-boom is lurking in the shadows. Artificial intelligence euphoria is literally right around the corner.

But before we break the glass to retrieve our 1999 market playbook, a choppy, corrective market needs to plant the seeds of doubt in every investor’s mind.

The herd needs to experience a little angst before we light the fuse. It’s already happening right on cue!

And we can thank the forces of seasonality and some well-timed worries shaking investor confidence this week.

Beware the Ides of… September?

September is a month of change. Summer ends, decision-makers return to the office, and a new school year begins.

It’s also a sketchy time for the markets. In fact, the “September Effect” is a real phenomenon market watchers have tracked for decades. Over the past century, September infamously stands out as the worst month for stock market returns, averaging out at -1%.

Does this mean every September is rough for investors? Of course not!

Last year, stocks ripped higher in September with the S&P gaining 3.5% on the month. In 2024, September was also strong, with the S&P flashing a 2% gain.

Right now, the averages are teetering in the red to begin the month. Following a strong summer punctuated by an impressive August rally, investors are suddenly confronted with a laundry list of stock market concerns.

Let’s build the wall of worry, brick by brick:

• Yields continue to rocket higher this week with the 10-year approaching October 2023 highs, teetering on the edge of a bigger breakout.
• Treasury Secretary Scott Bessent challenges the market with his “I am the house” comments on the administration’s Japanese Yen intervention.
• Crude crossing back above $100 for the first time since May as the Iran conflict continues with no end in sight.
• Trump floats a $5,000 “dividend check” for every adult in America if Republicans win in November.
• Probability of a 25 basis-point rate hike next week just climbed to 90%

Then, we have this week’s inflation data, which deserves its own extended explanation since the Fed is meeting next week.

August PPI came in a little higher-than-expected at 5.4%. Futures immediately took a dive. But if you were paying close attention to the tape, you might have noticed the negative reaction was already baked into the cake.

The numbers did not deviate too far from expectations, which is clearly not what the market wanted. Without some sort of a major outlier in the data this morning, the sellers were already testing the waters. Market participants wanted something to cling to that would convince them rising yields are going to calm down and the Fed won’t raise rates.

The key piece of information here is that the selling started 45 minutes before PPI hit the wire. Futures then cascaded lower once the numbers were out. Traders were already leaning on their sell buttons ahead of the date.

While this morning’s CPI report did nothing to stem rate-hike fears, the release was followed by a decent stock market rally.

A sign of volatility to come leading up to next week’s Fed meeting?

“You Are Here”

Investors are getting skittish right on cue. It’s September, and we enjoyed a relatively strong summer trading season.

Now, we have all the ingredients we need for a little volatility to scramble the bulls’ brains.

Here’s how I see the month setting up…

Midterm years are notoriously rough in the middle, as noted by the Stock Traders Almanac. The average midterm seasonal pattern begins with a rally that tops out in the spring, followed by months of weakness before stocks finally bottom out in early October ahead of a strong Q4 rally:

It’s important to note that the averages are outkicking their coverage considering we’re smack in the middle of a midterm election year.

The S&P 500 is up double-digits year-to-date. While we’re still in the “chop zone” of the midterm cycle, we are approaching the beginning of that strong fourth-quarter thrust that begins in early October. The strong performance and constructive consolidation over the summer bode well for year-end strength.

If we do encounter turbulence heading into the end of the month, it could be setting us up for the next big move higher.

Turning to our dot-com analog, we can see how the Asian currency crisis in Q3 1998 helped set up the final, face-ripping rally into early 2000.

The Nasdaq Composite endured a 25%-plus correction that lasted more than two months heading into Q4 1998. And we all know what happened next.

The dot-com bull quickly recovered and began its breakneck rally to its penultimate highs in March 2000, gaining 240% along the way

While I’m not expecting a correction as severe as 1998, any bout of volatility or downside we endure this month is likely to resolve to the upside and lead to a strong Q4 performance.

If we experience a rally that’s even half as powerful as what the market delivered in 1999, we’ll be swimming in a fantastic sea of trading opportunities.

Whatever you do, don’t get too caught up in any bearish narratives if the market loses its footing this September.

History says we’re pushing toward a generational rally. When it begins, you’ll need to be mentally prepared to take advantage of the euphoric action.