Seasonal Expert Eyes the Dog Days

08/26/2015 9:00 am EST

Focus: STOCKS

Jeffrey Hirsch

Editor-in-Chief, The Stock Trader's Almanac and Almanac Investor

Ouch! Stocks have gotten slammed, pushing the S&P 500 into negative territory for the year—and the Dog Days are not over for the market—cautions seasonal timing expert Jeffrey Hirsch, editor of Stock Trader's Almanac.

This hazy, hot, and sultry time during July and August were named the Dog Days of summer in antiquity as those days were often plagued with fever, disease, and discomfort.

Selling continues to plague the stock market and we expect selling will continue through September, the other worst month of the year along with its neighbor August. September is the worst month of the longer-term since 1950.

Seasonally, September’s first 11 trading days have a rather bullish bias with seven of these days garnering our bull icon for being up 60% or more of the time on the S&P 500 the last 21 years. Five bullish days in a row come right after Labor Day.

However, after that September often gets ugly. So look for a little respite in early September, but be prepared for another move lower in the second half of the month and into October. Here's the look at the market's current outlook:

Psychological: Edgy

Volatility, measured by CBOE VIX index is rising. Major indices are negative year-to-date again. 200-day moving averages have been violated and there is a death cross on DJIA’s chart. Traders and investors not in cash and/or on vacation are definitely worried.

CBOE Weekly Put/Call ratio climbed to 0.78 and Investor’s Intelligence is reporting the highest number of correction advisors since last October. Sentiment is approaching bearish levels seen at some recent market lows, but a catalyst to turn the market is still absent. 

Fundamental: Weak

Corporations are struggling with sluggish global growth and a strong US dollar. Revenues and earnings may have largely beat expectations in the second quarter, but the bar was not that high.

Crumbling commodity prices are fueling fresh new deflation concerns. For the time being, the US economy has largely managed to shrug off falling global growth. At some point, it may no longer be able to do that.

Seasonal: Bearish

As noted, since 1950, September is the worst performing month of the year for DJIA, S&P 500, NASDAQ (since 1971), and Russell 1000 (since 1979).

Beneficial pre-election-year forces do little to change this. Depending on index, September is still the worst or second worst month of pre-election years, negative across the board.

As is frequently the case many market pundits were ready to call Sell in May a bust this year when the market made nominal new highs in May and July. O ye of little faith.

Thankfully, our Seasonal Sell Signal for DJIA, S&P NASDAQ were rather timely and have helped us avoid much of the carnage. 

So try to be patient and keep your powder dry for what looks likely to be a decent seasonal buying opportunity later this summer or early autumn. Wait for the fatter pitch and enjoy the last days of summer.

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