U.S. stocks have hit new highs again! But the "September curse" alarm has been sounded, is a 10% pullback on the countdown?

According to Zhitong Finance APP, despite significant risks in the market, the U.S. stock market continues to hit new highs. However, seasonal trends indicate that there will be a 7% to 10% pullback in the U.S. stock market at the end of summer, especially after a strong performance from May to July.

Seeking Alpha contributor Paul Franke published an article stating that the U.S. stock market has a long history of peaking between July and August, with September being the worst-performing month for holdings over the past 50 years. Additionally, the strong performance from May to July seems to increase the likelihood of a sell-off in the stock market at the end of summer. Conversely, the U.S. stock market typically achieves its best gains from November to May of the following year.

 Seasonal Performance of the S&P 500 Index

The biggest risk currently facing the market is the approaching August 1 tariff deadline set by U.S. President Trump. If Trump indeed raises tariff rates on multiple countries globally, a widespread trade war could trigger foreign investors to sell U.S. financial assets in retaliation.

At this critical moment, Franke believes that the tariff chaos in early August is the most likely reason for an impending pullback in U.S. stocks. Of course, there are other factors that keep Franke vigilant about the stock market.

Technical Indicators Signal Danger

Franke accurately predicted at the end of 2024 that a severe pullback was imminent, as multiple indicators showed excessive optimism in market sentiment at that time. Short-term market volatility may simply be a reaction to oversold and overbought conditions. Unfortunately, a series of warning signals indicating an overbought market reappeared again at the end of June and during July.

Put/Call Option Trading

The following chart tracks the put/call option trading for individual stocks and indices on the Chicago Board Options Exchange (CBOE), with data dating back to late January 2023. There have been five previous instances where the levels of put and call option trading were similar to current levels, four of which saw the S&P 500 index peak within days (as indicated by the red arrows) and subsequently decline by 8% to 20%.

Advance-Decline Line

In the past week of trading, the advance-decline line for New York Stock Exchange stocks has significantly declined, further confirming the weakness of the upward trend. When the benchmark index continues to set new 52-week highs while many individual stocks begin to show reverse trends, investors should conclude that the market is about to face difficulties.

Low Market Participation

Another long-standing issue is that since the beginning of 2023, the bull market rally has lacked participation, or in other words, breadth. Over the past five years, most of the gains in the U.S. stock market have come from 40 to 50 large tech stocks, while the other 4,000-plus stocks have seen very slow growth. Historically, a severe lack of participation is a "typical" characteristic of market tops, which usually take 5 to 10 years to shake off a downward trend after such tops occur.

The significant performance disparity between the Nasdaq 100 Index and the Russell 2000 Index clearly reflects this issue. Without holding large tech stocks, a portfolio is likely to have been flat or only slightly up for years.

Beware of "Black Swans"

In addition to tariff risks, Trump has recently been diagnosed with chronic venous insufficiency, raising concerns about his decision-making ability and capacity to fulfill presidential duties.

Another issue facing the market is that Trump may attempt to demote or fire Federal Reserve Chairman Jerome Powell. Although the actual impact on interest rate policy may be minimal since other Fed governors also have voting rights, such turmoil could undermine the core concept of an "independent" Federal Reserve, potentially leading many investors to hastily sell stocks.

Franke warns that by October, the U.S. stock market may experience a correction of 10% or more. He advises investors to allocate 20% to 30% of their net assets to gold, silver, or platinum to effectively reduce risk.

Finally, Franke states that investors should remain vigilant to see if more severe "black swan" events occur. The U.S. economic growth in 2025 is expected to be quite weak, with a projected real GDP growth rate of 1% in the first half of the year. If the trade war leads to cuts in regular spending by businesses/consumers, a recession and a significant drop in the stock market are entirely possible. Given that the U.S. stock market's valuation is close to historical highs, equivalent to or exceeding levels from December to February of last year, any unexpected troubles could lead to a substantial market decline