Boring Dog Days? Here's Why You Shouldn't Ignore August…

October is typically viewed as an investor’s worst nightmare.

Our bias tells us that fall is crash season. Open your history books and you’ll find plenty of horrifying drops ranging from the 1929 crash that sparked the Great Depression (Oct. 28-29) to the infamous Black Monday crash in 1987 (Oct. 19).

Yes, October can be volatile. But the dog days of summer are far worse, on average.

I know this probably goes against all your trading instincts. After all, you’ve heard stories of the painfully boring summer trading months. Cyclically, start of the third quarter isn’t an ideal time to jump into new long-term investments. That’s because July is the beginning of the Nasdaq’s worst four months of the year.

But the market fought its way to new highs last month. A third-quarter slump has been put on hold.

Perhaps the summer doldrums are waiting for a new trading month. Today is August 1st. Nothing of consequence is supposed to happen in August. The movers and shakers are living it up at their beach estates and trading rooms are quiet, right?

Not exactly. According to the Stock Trader’s Almanac, August is the worst month for the Dow, S&P, and Nasdaq since 1987. If there’s one month investors should avoid, it’s not October. August is the real performance killer.

Here’s an interesting tidbit floating around the financial blogosphere right now:

“August has been the worst month for the SPX over the last 30 years, averaging a -0.86% decline,” MKM Partners technical analyst Jon Krinsky noted in a recent report. “Of course this is just an average, and there have been some strong gains in August especially during strong uptrends (2014, 2009, 2006).”

Surprised?

You shouldn’t be. Remember the eurozone panic six years ago? The swift crash of late-July and August knocked the S&P within a hair of a legitimate 20% correction in 2011.

More recent years haven’t brought as much turmoil. But they haven’t exactly been uneventful.

A tame July led to a modest August rally in 2012. The market gave back almost all its July gains in August 2013. And a late July dip was eagerly bought in 2014.

The summer of 2015 was a doozy for investors. After an uneventful start to the third quarter, the market started to unravel in late August, falling double digits before the end of the month. That’s right – August 2015 was when the pullbacks started in the small-caps and biotech sectors that would eventually turn into nasty bear markets.

At a glance, it’s easy to see how August has been anything but boring over the past few years. In fact, we didn’t see a break from the market madness until last year, which turned out to be an uncharacteristically quiet period for the major averages. The S&P 500 finished out August 2016 at breakeven as it consolidated late July’s sharp post-Brexit move. It was our first real taste of the summer doldrums in years.

Could we be in store for another tumultuous trading month this August? Anything’s possible. We saw additional weakness appear in the tech sector yesterday – yet earnings are coming in strong so far this week.

We’ll see how it all shakes out soon enough. Don’t sleep on August – it could turn into the most exciting trading month of the year…

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning