First of all, I want to thank John and Emily for cranking out awesome content while I was out. If you haven’t read the issues, it’s worthwhile to go back and check them out.

Let’s get this kicked off by taking a look at what seasonal changes in the stock market predicted for July, and where we could go from here.  Hint – You’re going to want to go back and reread John’s articles about hedging your portfolio. 

First, let’s review a few of the major indices and why I like to have seasonality as part of my checklist.  These charts come from stockcharts.com.  The first is looking at the Dow 30.  Over the last four years, the Dow 30 has traded in a positive direction in July.  All you had to do was buy on the first day of the month and sell on the last and in the last four years you would average a 2.9% return in a month.  

Here’s how that would have looked if you traded the ETF of the index – the DIA.

You’ll notice a similar pattern in the S&P 500 index, with a winning streak in July. 

Trust me, the Nasdaq 100 looks similar.  July has historically been a strong month for the market.  

I had a few bearish trades throughout the month, in anticipation of the rally stalling out at 4500, which never came to be, but I was overall bullish in July.  

So, what does seasonality tell us about August?  Let’s first start with the Dow 30.  Over the last 4 years, the index has managed to come out ahead in August 50% of the time with an average gain of less than 1%.  September is far worse, only gaining 25% of the time with a massive -3.4% average. 

The S&P 500 follows a similar pattern.  It trades 50-50 in August and drops off in September. 

Nasdaq does better than the others, but August is still a toss-up, leading into a dismal September.

I can already hear the emails in my inbox saying, Jeff, you only went back four years!  Well, I won’t bore you with the charts, but trust me, the numbers are marginally better going back 10 years.  

So, what areas should we look at if the Down 30, S&P 500, and Nasdaq 100 are on shaky ground for the next two months?

Look for stocks within defensive sectors like Consumer Staples, XLP and Utilities, XLU.  Consumer Staples has done well over the last four years in August, and XLU has had a strong month in August for the last 9 years, gaining 75% of the time with an average gain of 1.7%.

What do you think? Are we headed higher over the next two months or will the seasonality trend of a marginal August and dismal September continue?  

If you have any questions, comments, or anything we can help with, reach us at any time.

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Jeff Wood
Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation.