Is the September decline in US stocks not over yet? Citadel strategists warn: Downward pressure will persist until the end of the month, with a potential turnaround in October.

The September correction in US stocks is not yet over, but a turnaround is brewing.

Scott Rubner, chief equity and derivatives strategist at Citadel Securities, warned that despite clear signs of improvement in market sentiment and positioning, the weakness in September is not over yet, and the stock market still faces further downside risks before the end of the month.

Scott Rubner points out that the supply and demand dynamics will remain unfavorable until the end of the month, and technical factors will continue to exert downward pressure on the stock market, which is expected to remain under pressure for the next two weeks. However, with positions already reduced and sentiment rapidly deteriorating, he says he is "increasingly comfortable" with taking advantage of the market weakness before the end of the month to add to core long positions.

Approximately $7 trillion worth of U.S. stock option positions will expire this Friday, representing about 25% of total U.S. option exposure. Meanwhile, the impending closure of corporate buyback windows, continued room for systematic selling by institutional strategies, and ongoing quarter-end cross-asset rebalancing pressures—these multiple factors combine to form the main short-selling drivers before the end of the month.

Beneath the surface calm, the decline is more widespread than the index suggests.

While the S&P 500's decline this month appears limited, it masks broader damage within the market. Nine out of eleven sectors have recorded declines over the past month, with only energy and communication services bucking the trend and rising, though these two sectors together account for only about 14% of the index's weighting.

The concentration of the index has acted as a buffer. The top 10 constituent stocks of the S&P 500 currently account for about 40% of the total weight of the index. These large-cap stocks have generally outperformed the average, making the overall index appear relatively stable. However, the weakness has actually spread to a wider range of individual stocks.

The structure of the options market has also changed significantly. The one-month standardized put/call skew of the S&P 500 is currently at the 62nd percentile over the past year, while the corresponding figure for the Nasdaq 100 has risen to the 70th percentile, and the Russell 2000 has reached the 83rd percentile.

Investors are seeking protection at the index level at significantly higher costs, but this demand has not yet spread to the sector level—the technology sector is still only at the 40th percentile in terms of skewness, and the consumer discretionary sector is even lower at the 12th percentile.

End-of-month supply and demand balance: Sellers still have the upper hand.

Rubner believes that although sentiment has deteriorated rapidly, the recent technical outlook remains unfavorable for the stock market, with multiple potential selling forces converging.

Quantitative strategies still hold positions available for sale. Volatility-targeted strategies remain highly positioned, with simulated positions for 10% volatility-targeted strategies at approximately 86%, the highest level since March. Although CTAs have reduced their positions, the overall Z-score for US stocks has fallen from +2.4 at the end of August to the current +1.1, meaning that CTAs still have room to sell if the market weakens further.

End-of-quarter rebalancing is creating selling pressure across asset classes. The S&P 500 is up about 1% so far in the third quarter, while bonds are down about 2.2%. This spread means pension funds may need to sell stocks and buy fixed-income assets to complete rebalancing at the end of the quarter. The top 100 U.S. pension plans have a funding ratio of approximately 112%, the highest level since 2001, and this strong funding position further incentivizes them to reduce their equity allocations.

The expiration of "triple witching day" options may remove another layer of support. This Friday, approximately $7 trillion in U.S. stock option exposure will expire, representing about 25% of total U.S. option exposure. As these positions expire or roll over, market-making hedging mechanisms that previously helped suppress realized volatility will face a reset, and the market's sensitivity to subsequent fund flows may increase significantly.

Stock buybacks have entered a quiet period, with key buyers absent. Currently, 10% of the S&P 500's weighting is in the pre-earnings quiet period, and this proportion will rise to 61% by September 30th, with most companies not resuming buybacks until November 1st. In the window of least calendar effect, one of the market's most important structural buyers is withdrawing.

Historical pattern: Late September is the peak period for the decline.

Historically, the weakness in September tends to be concentrated in the latter half of the month, and is even more pronounced in midterm election years.

Since 1930, the average path of midterm election years shows that the market typically continues to decline by about 1.1% before September 30, then begins to recover in October, and accelerates its strength around the election day.

Rubner points out that the market is currently entering its weakest window of the month, and his tactical assessment remains unchanged: the stock market still has room to fall before the end of the month.

Post-Quarter End: The Strategies for the Fourth Quarter

Despite remaining cautious in the short term, Rubner expressed growing optimism about the post-quarter outlook, believing that several favorable factors are accumulating.

The excessive enthusiasm for AI trading has subsided significantly. Semiconductor volatility has given back its previous gains, leveraged semiconductor ETFs are now under management at about half their June peak, retail participation has declined sharply, and some equipment and infrastructure stocks have fallen 30% to 55% from their highs. The tone of market conversation has shifted rapidly from the euphoria of three months ago to caution and even pessimism.

Seasonal factors will reverse into a tailwind. In the fourth quarter of a midterm election year, the average increase is 5.6% from September 30th, higher than the average of 2.9% for all years, and the average path turns upward almost immediately after the end of the quarter.

Buybacks will resume. More than half of the S&P 500 weighted stocks will re-enter the open window before November 1, and will almost fully resume by around November 8, accompanied by a new round of buyback authorizations in the third quarter.

Earnings season is about to begin. Third-quarter results will be released starting in mid-October, while the second-quarter earnings season saw approximately 33% growth in earnings per share and the steepest upward path in earnings revisions since at least 2000.

Rubner concluded that the technology and communications services sectors together account for nearly half of the S&P 500's weighting, and it is within these sectors that the most thorough position and leverage cleansing has occurred. Once this sector regains buying interest, the necessary momentum to drive the index will be minimal. If the AI sector's leading performance spreads again during earnings season, this rebound could extend to a wider market.

Risk warning and disclaimerInvesting involves risk; please exercise caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Any investment decisions made based on this information are at your own risk.