Back in mid-July, following a brisk market rally off of June’s lows, it became apparent that the market was headed for another “Hot July”. Based upon past full-month DJIA July gains in excess of 3.5% a better buying opportunity was anticipated. Whether or not that opportunity was the end of August or an even better entry waits in the often volatile months of September or October remains to be seen. DJIA’s 4.5% August decline is less than the average 6.9% drop following a Hot July and it was the eleventh worst August for DJIA since 1950. With help from index heavy-weight Apple (APPL), S&P 500 and NASDAQ fared better, off 3.1% and 1.0% in August. In order to gain a better perspective on the possible ramifications of DJIA’s August decline for full-month September and the highly anticipated fourth-quarter rally, the following tables were constructed.
In the above tables, every declining August is ranked by magnitude of decline since 1950 for DJIA and S&P 500 and 1971 for NASDAQ. Similar to this year’s threat of military action by U.S. forces against Syria for its use of chemical weapons, many of the past negative Augusts’ were the result of exogenous events. In 1998, Russia devalued its currency, defaulted on domestic debt and halted payments to foreign creditors in response to its own financial crisis. August 1997 was a similar event, but triggered by a currency crisis in Asia. In August 1990, Iraq invaded Kuwait and in 1974 Richard Nixon became the first U.S. president to resign from office. In September 1997 and 1998, the markets quickly rebounded and have done so again so far this year.
Of more interest, following a down August there have been more advancing Septembers than when August was up. Although the historical odds of a positive September after a declining August are still roughly 50/50, this is a far improvement over the approximately one out of three times that September was up following an up August.
In the daily charts above, and noted on Tuesday, NASDAQ has broken out to a new recovery high, but DJIA and S&P 500 have yet to do so. Today’s modest declines snapped the S&P 500’s multi-day winning streak. Considering the brisk pace of gains so far this month it was to be expected as relative strength, stochastic and MACD indicators are at or near overbought levels again. If the market can consolidate and hold onto its recent gains and DJIA, S&P 500 and Russell 2000 can join the NASDAQ at new highs, the prospects of a less treacherous September/October would improve greatly. Until then, numerous seasonal, technical and geopolitical elements warrant a cautious posture. 50/50 may be an improvement in September’s historical odds, but it is still far les than desirable.