Stock Market Seasonality — August
“Climate is what you expect; weather is what you get.”
Back when the U.S. was an agrarian nation, August used to be the best month for the stock market in performance terms. But it lost the lead as the strongest month in 1951, and now, with only about 2% of the country involved in farming, August has taken its place as the worst.
So that should just about settle it, right? There’s no point in being invested in stocks in August. So selling in May and going away looks better and better.
Not so fast. If you actually look at the numbers, dumping all your stocks in August and putting the proceeds into sunblock and ice cream doesn’t seem like such a smart strategy.
The average August loss for the Dow is 0.1%. The average August loss for the S&P 500 is 0.04%. And the Nasdaq, contrary as always, actually averages a 0.1% gain in August!
So if you think that the position of August at the bottom of the heap, performance-wise, makes it a good time to take a vacation from paying attention to stocks, you’re probably wrong.Thus far in August, markets are pretty flat, and there are a couple of reasons for that. First, markets have been in a broad uptrend since October 2011. Yes, there have been four sizable corrections during this run (each lasting about two months), including the one in May and June of 2013. But the S&P 500 is up from below 1,100 to near 1,700 during that time. So if the market wants to take a break, August seems like a good time for a vacation.
The second reason for August’s lack of zip is that stock-buying decisions are made by senior people in big institutional investment houses and hedge funds, and such people have to go on vacation. And anyone who has spent any time in New York City or Boston in August knows that they can be hot, humid hell-holes, which makes heading for the beach or the mountains a logical decision. When senior money managers are out of town, the underlings left in charge are often unwilling (or not permitted) to make big trading decisions. So trading volume in August drops because the Big Dogs are out of town. (The buttoning up of portfolios in December, both for the Holiday Season and year-end accounting has the same effect.)
So what’s the point?
The only point I have to make is a familiar one and it’s this: There is a much, much better way to decide what to think about the market than looking at the calendar. The generalizations about market behavior in August will tell you what history says about the climate, but won’t tell you a thing about the weather right now.
If you use a blunt instrument like “sell in May and go away” to make your investment decisions, you would have missed big rallies in both 2012 and 2013.
The better choice would be to have a system for determining when the momentum of the market is positive and when it turns negative, and act accordingly.
Cabot’s growth disciplines advise moving toward heavier investment when markets are in uptrends and toward heavier cash positions when markets are in downtrends.
If this seems like saying that you should prepare a picnic when the sun is shining and prepare for a day indoors when it’s raining, you’re exactly right. It just makes sense.
Cabot’s market timing indicators have the validity that comes with decades of observation and analysis of stock markets. And they have clearly defined rules for when a bull market turns into a bear and vice versa.
Right now, markets are in an uptrend and the stuffed animals on the mantel in our office are both bulls, indicating that both the short- and medium-term trends are up.
The weather is fine, despite what the climate chart says. Time to pack the picnic basket with great growth stocks. We can help you decide what to buy by providing you with the full list of this market’s leading stocks.
Just click here for details.
Tim’s Comment: If this had been a quote by Rodney Dangerfield or Don Rickles, perhaps the complaining would take center stage. But because it’s by Lincoln, almost universally rated America’s best president, we know that rejoicing about the roses, finding the good among the bad, is the prescription. In investing, that can be done in two ways, market timing and stock selection. I recommend both.
Paul’s Comment: Market volatility can be a terrible thing, wiping out millions and billions of dollars in the twinkling of an eye. But that same volatility is responsible for the enormous gains that can come to growth investors in just as short a time. So, as Lincoln seems to be counseling, I choose to focus on the possibility that a dangerous place like the stock market can produce gains, not the possibility that a market full of opportunities can clean me out. Being aware of both risk and reward allows me to appreciate the possibilities.
In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
Chloe Lutts of Dick Davis Digests writes about how companies gather and use Big Data, and how companies need help with analyzing, visualizing and sharing that data. Stock discussed: Tableau Software (DATA).
In this issue, I write about the simplest method for finding great growth stocks that are in strong uptrends. The key is screening for stocks with price momentum that are liquid and in the right price range. Stock discussed: Perfect World (PWRD).
Cabot Stock of the Month editor Tim Lutts answers some questions from readers and give the fourth of his series of ten stocks that are changing things in revolutionary ways. Stock discussed: Qihoo 360 (QIHU).
Have a great weekend,
Editor of Cabot China & Emerging Markets Report
and Cabot Wealth Advisory