The Dog Days of Summer Are Upon Us

As technicians we have many tools to help us manage risk in the stock market. One of the more valuable studies that we perform regularly is the seasonality of the market. During certain times of the year, the market tends to behave in certain ways, while other times of the year are often much different. Today I want to take a look at the dog days of summer and how US Stocks behave during July and August.

Today's chart comes from Arthur Hill over at Stockcharts.com. I was fortunate enough to have lunch with Art recently when he flew to New York from his home in Belgium. Definitely one of my favorite technicians. He put out a note Tuesday pointing to the struggles in the S&P500 during July and August. This chart represents the percent of the time that the S&P is up in any given month over the past 20 years. Notice how the month of July is down more often that it's been up:

Also note that the average return for July over those 20 years is 0.0%. To make matters worse, the month of August has actually averaged a negative return since 1995. So although the month of August is positive slightly more often than it is negative, the losses over the past 20 years have far outweighed the gains.

Like our other technical tools, seasonality should be used in conjunction with the rest of our analysis. Plus at the end of the day, price is the only thing that pays. So everything else we look at is strictly supplemental to price behavior. But based strictly on these seasonal tendencies, the S&P500 is likely in for some sort of correction between now and Labor Day, whether it be through time or through price.

Another nice point that Art is making is how Volatility tends to spike in July. Here is the same 20-year seasonal study but for the Volatility Index. Notice how much more bullish the month of July has been when compared to the rest of the year. The average volatility spike is basically twice as much as the next most volatile month. 80% is a huge number:

Volatility spikes tend to coincide with stock market corrections. So based on these seasonal studies, I would expect more volatility and little upside in the major stock market indices over the next 6-7 weeks. We'll see.

Here is the chart I posted Monday about why it makes perfect sense for the stock market to correct from up here. This time, from a pure price perspective.

It's all lining up nicely:

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Source:

Arthur Hill July 8 2014 Market Message (StockCharts.com)

Tags: $VIX $SPX $SPY $ES_F $VXX