The Meaning of August
Sep 5th, 2006 | By Penny Sleuth Contributor | Category: Investing Strategies, MacroeconomicsHello again, Sleuths,
In my last Sleuth column, I mentioned that my articles over the past few months on volatility and the VIX Index had struck a chord among Sleuthers. Since that column, I have received a few more e-mails on the subject.
As I said last time, I’m glad the VIX has generated so much interest. I have found it to be a useful tool in analyzing the market’s short-term direction. I’ll touch on this subject again in an upcoming article and address some of e-mails that have been sent in.
But today I decided to take a break from volatility and look at the market from a seasonal perspective. Actually, it’s a subject I’ve written about in some earlier Technical Tuesday columns. However, I haven’t discussed seasonal market patterns since my May 9 article. So with the major averages having recovered nicely in August after suffering through a difficult May-through-July period, I began to wonder what, if any, clues we might be able to draw from this late-summer rebound as we look toward the end of the year.
To search for some answers, once again I took a look back at the performance of the S&P 500 Index from 1970-2005. Since the S&P 500 has now concluded August with a 2.1% gain, I wanted to find out if any inferences for the rest of the year could be drawn from a positive August.
I should point out that, no matter what has transpired in the past, the market is certainly capable of doing anything. However, I do believe you can learn from past market trading patterns because stocks and indexes often repeat prior behavior. That’s one of the reasons that drew me to study technical analysis. Besides, isn’t that why our history teachers used to tell us we studied the subject they taught?
Now, based upon the past 36 years of market history, what does has a positive August in the S&P 500 imply about the likely performance of this widely followed index for the remainder of the year? Before I share with you the data I uncovered, let me first pose — and answer — another question: Why am I singling out August’s results for examination?
I have two reasons. First, as I said earlier, the S&P 500’s profitable August results followed immediately on the heels of a difficult three-month period. Second, August is not only one of the slowest trading months of the year, it’s also traditionally been one of the most challenging for investors as well.
OK, so what did the S&P 500’s performance over the last 36 Augusts suggest about the chances for profitability during the last four months of this year? Here’s what I found…
In the years 1970-2005, the S&P 500 finished the month of August in positive territory on 20 occasions, or 56% of the time. At first blush that may seem a bit surprising, given August’s reputation for being a difficult month. However, in light of the stock market’s inherent upward bias, a 56% positive rate is not exactly an eye-popping percentage. Besides, the cumulative return for the 36 Augusts from 1970-2005 is a mere 0.2%.
Nevertheless, just as in 2006, the S&P 500 Index returned a positive result in 20 of the prior 36 Augusts. So, what happened in those 20 years when the S&P 500 ended August higher than where it began the month? Or to put it another way, was the Index’s ability to forge a positive result in a traditionally difficult month a harbinger of good times for the rest of the year?
Let’s look at the totals. On the 20 occasions from 1970-2005 when the S&P 500 turned in a positive August, the venerable benchmark Index finished the year with additional gains 13 times. That’s a 65% success rate.
Not bad, huh? So, should you rush into the market with all of your remaining investment dollars as soon as you finish reading this column? After all, 65% is pretty favorable odds and much better than August’s 56% overall success rate. To answer that question, permit me to quote well-known college football commentator and former Louisville and Indiana coach Lee Cors “Not so fast, my friend.”
You see, although the S&P 500 followed up a positive August with a profitable September-to-December period 13 times, in four of those years the September-December return did not exceed 0.6%. That’s not a lot of profits for a four-month period, especially when you consider the risk of being in the market. To put it another way, on the 20 occasions when the S&P 500 Index fashioned a profitable August, it was able to tack on additional gains for the rest of the year of 0.7% or greater in only nine years, or just 45% of the time.
If that’s not enough to give you pause, let me throw one more piece of information at you. On the 16 occasions where the S&P 500 lost money in August, it was able to turn a profit over the last four months of the year 12 times, a 75% success rate. Not only that, but the last time the S&P 500 lost money between September and December after finishing August in the red was in 1981. So, if one can read anything into August’s results, it may be as a contrary indicator.
Now, I am not suggesting the historical record shows we’re destined for a rough last four months of 2006, although that could very well happen. What I am suggesting is that one should not assume that the bullish turnaround we’ve just witnessed in the market automatically means that the rest of the year will be positive.
Here’s one final piece of historical data to consider: In those 20 years when the S&P 500 turned in a profitable August, the Index pulled back at least 3% during the succeeding four months on 13 occasions, or 65% of the time. And in 10 of those years, or half the time, the S&P 500 suffered a drop between September and December of at least 6%. So, even if the last four months of 2006 turn out to be bullish, you are likely to get a more opportune time to invest.
If you are looking some more definitive clues on whether, and when, to commit additional cash to the market between now and the end of the year, I suggest you consider using some of the indicators I’ve described in other Technical Tuesday columns. More often than not, those tools will point you in the right direction. Just don’t read too much into August’s results.
Trade well,
Mark Bail
Septmeber 05, 2006
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