US stocks' September downturn not over yet? Citadel strategist warns: Downward pressure still exists before month-end, potential turnaround in October

The adjustment in the U.S. stock market for September has not yet come to an end, but a turnaround is brewing.

Citadel Securities Chief Equities and Derivatives Strategist Scott Rubner warns that although there are clear signs of improvement in market sentiment and positioning, the weakness in September is not over, and there is still further downside risk for stocks before the end of the month.

Scott Rubner points out that the supply and demand dynamics will remain unfavorable until the month’s end, and technicals are still acting as a drag on stocks, so the market is expected to remain under pressure in the next two weeks. However, given that positions have been reduced and sentiment has soured quickly, he now feels more comfortable using the month-end weakness to add core long exposure.

About $7 trillion worth of U.S. equity options positions will expire this Friday, accounting for about 25% of the total options exposure in the U.S. Meanwhile, the corporate buyback window is closing, systematic strategies still have room to sell, and cross-asset rebalancing pressure at quarter-end continues—all these factors combined are the main drivers for further downside before month-end.

Beneath the Surface Calm, Declines Are Broader Than Indices Suggest

The S&P 500’s monthly decline appears limited, but this masks much broader internal damage. Nine out of eleven sectors have recorded declines this month, with only energy and communications services bucking the trend, and together these two sectors account for merely about 14% of the index’s weight.

Index concentration has played a buffering role. The top 10 S&P 500 components now account for around 40% of the index's total weight, and strong performance among these heavyweights makes the overall index look relatively resilient, when in fact the weakness has spread to a much larger range of stocks.

There have also been notable changes in the options market structure. The S&P 500 one-month normalized put/call skew is now in the 62nd percentile over the past year; for the Nasdaq 100, it has risen to the 70th percentile, while the Russell 2000 has reached the 83rd percentile.

Investors are seeking index-level protection at significantly higher costs, but this demand hasn't expanded to the sector level—the tech sector’s skew remains in the 40th percentile, while the consumer discretionary sector is even lower at the 12th percentile.

Month-End Supply-Demand Balance: Sellers Still in Control

Rubner believes that although sentiment has deteriorated quickly, technicals remain unfavorable for equities and multiple potential selling forces are aligning here.

Quant strategies still hold saleable positions. Volatility-targeted strategies remain highly positioned; the simulated exposure of a 10% volatility target strategy is about 86%, the highest since March. While CTAs have reduced their stock holdings, the overall Z-score for U.S. equities has only dropped from +2.4 at the end of August to +1.1 now, indicating further room for additional CTA selling if the market weakens further.

Quarter-end rebalancing brings cross-asset selling pressure. The S&P 500 has gained about 1% this quarter while bonds are down roughly 2.2%; this difference means pensions may need to sell stocks and buy fixed-income assets at quarter-end to rebalance. The top 100 U.S. pension funds have a funding ratio of around 112%, the highest since 2001, and this strong financial position further incentivizes de-risking and lower equity allocations.

“Triple Witching” options expiry could remove a key layer of support. About $7 trillion in U.S. equity options exposure will roll off this Friday, about 25% of total. As positions expire or roll, options market makers’ volatility suppressing hedging activity may reset, making the market more sensitive to subsequent flows.

Stock buybacks enter blackout window, key buyers are absent. Currently, 10% of S&P 500 weight has entered the pre-earnings blackout period, rising to 61% by September 30, with most companies unable to resume buybacks until November 1. In the weakest calendar window, one of the market’s most important structural buyers is withdrawing.

Historical Pattern: Declines Tend to Concentrate Late in September

Historical data shows that market weakness in September typically concentrates in the second half of the month, and is pronounced in U.S. midterm election years.

Since 1930, the average pattern for midterm years shows the market typically falls a further 1.1% ahead of September 30, then begins to rebound in October, accelerating into and around Election Day.

Rubner points out that the market is now entering its weakest window of the month. His tactical view remains unchanged: there is still downside risk for the stock market heading into month-end.

After Quarter-End: Fourth Quarter Positioning Logic

Though short-term caution remains, Rubner is increasingly optimistic about the setup after quarter-end, as several supportive factors are building up.

Excess enthusiasm for AI trades has receded sharply. Semiconductor volatility has round-tripped recent gains, leveraged semiconductor ETF assets under management are about half their June peak, retail participation has dropped dramatically, and some equipment and infrastructure stocks are down 30% to 55% from highs. Market chatter has shifted swiftly from exuberance three months ago to caution, even pessimism.

Seasonal factors will turn into tailwinds. In U.S. midterm election years, Q4 average gains from September 30 reach 5.6%, versus the all-year average of 2.9%. This trend historically turns higher almost immediately after quarter-end.

Buybacks will return. Over half of the S&P 500 weight will re-enter the open window before November 1, and nearly all by around November 8, alongside a new wave of Q3 buyback authorizations.

Earnings season is about to kick off. Q3 results start rolling in by mid-October. Q2 earnings season saw about 33% EPS growth, and the sharpest positive revision path since at least 2000.

Rubner concludes that information technology and communications services together make up nearly half the S&P 500, and these are the sectors where position and leverage reduction has been most thorough. Once buyers return to these groups, little incremental demand will be needed to drive the index up. If AI leadership expands again during earnings season, the rebound could extend to a wider swath of the market.