Stock Market Seasonality -- August

Stock Market Video

Stock Market Seasonality — August

Fortune Cookie

In Case You Missed It

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Stock Market Video

In this week’s market video, Paul Goodwin looks at the fragile state of the markets, which have been damaged by some high-profile misses during earnings season and a lack of economic good news. It’s a good time to keep a significant chunk of cash on the sidelines and restrict your buying to well-known, liquid leaders that have weathered their earnings reports in good shape. He examines at a few of those, plus a high-profile loser or two.

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 100% quantitative 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, stock markets are as flat as flat can be, and the stuffed animals on the mantel in our office remind us in a humorous way, indicating that while the short- and medium-term trend is negative, the long-term trend is still up.

If this sounds like trivial information to you, I’d point out that Cabot has over 40 years of evidence to show that knowing the actual trend of the market (and adjusting your buying and selling strategy accordingly) is anything but trivial. And adjusting your growth strategy to align with the momentum of the market is the smartest move you can make.

Want help determining the direction of the market and how to respond to it? A trial subscription to a Cabot growth advisory can give you all the help you need. Just click here.

This Week’s Fortune Cookie

Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons by clicking here.

I’m trying to shake up the Fortune Cookie feature a bit. Today, instead of mining my books of stock market and philosophical wisdom, I’ve asked Tim to send me a favorite bumper sticker along with a short comment. I’ll do the same.

Tim’s Bumper Sticker:

I saw this bumper sticker way back when I was in my 20’s hitchhiking around the U.S. and generally getting educated in the ways of real people. It resonated then and it resonates today, even though I don’t believe I’ve seen it since. There’s no mystery here; I like books, preferably read, not eaten.

Paul’s Bumper Sticker:

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Probably no mystery here, either. If people don’t take a critical look at what they believe every once in a while their opinions can harden into fortresses that are completely resistant to all assaults, including ones from new evidence and new ideas. Nature eventually cracks the rigid rocks, but new flowers bloom every spring.

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.

Cabot Wealth Advisory 8/3/15 — The Best Consumer Stocks for Retirees

Cabot Dividend Investor’s Chief Analyst, Chloe Lutts Jensen, writes about the importance of consumer stocks to the health of the U.S. stock market (and the portfolio’s of retirees). Stock discussed: Church & Dwight (CHD).

Cabot Wealth Advisory 8/4/15 — I Didn’t Shoot the Lion

Tim Lutts, Chief Analyst for Cabot Stock of the Month, gives his optimistic take on the advantages of being a long-term investor. He also looks at how Elon Musk gets so much market power out of virtually no money. Stock discussed Tesla (TSLA).

Cabot Wealth Advisory 8/6/15 — Apple (AAPL) Changes Character

I write in this issue about what happens when a popular, market-leading stock moves from being a growth stock to being a value or income stock, which can confuse investors. Stock discussed: Apple (AAPL) and NetEase (NTES).

Sincerely,

Paul Goodwin,

Chief Analyst, Cabot China & Emerging Markets Report