Welcome To Summer (Queue The Scary Music)
Jay Kaeppel | Jun 30, 2015 11:49AM ET
Why is that people are always so surprised when stock markets decline?
We’ve had a rip-roaring bull market for years on end (granted, thanks primarily to an orgy of printed money, borrowed money and artificially low interest rates, all of which is almost certain to end badly at some point, but I digress), the market averages have been building classic multiple top formations for months (See Figure 1) and seasonally we are smack dab in the worst time of the year.
And then just as it has always done, the stock market experiences a decline and lots of people freak out! Oh well, same as it ever was I guess.
Figure 1 – Major long-term advance followed by an extended topping formation, followed by, well, what else?
Now I make no claims to have “called the top”, nor am I in the “wildly bearish” camp. My only point is that there has been ample warning that a pullback was quite possible. Investors and hedgers have had ample opportunity to act (to sell or hedge) and ample warning as the major averages struggled to make any real headway.
If you are new to the financial markets, I advise you to memorize the following. Look at Figure 2 and repeat after me:
Jays Trading Maxim #77: If price tries to breakout multiple times but fails, something bad usually follows. So don’t just sit around and wait for the “something bad.”
Figure 2 – When price tries time and to breakout but cannot the market is (usually) telling you something important.
Where we are Now, Seasonally Speaking
Figure 3 shows the seasonal annual trend for the S&P 500. Simply note that as I have discussed in the past, the end of May into September and October period is not typically “High Season” for the stock market.
In Figure 3 note the relative performance for the S&P 500 Index during the summer months compared to the rest of the year.
Figure 3 – Seasonal annual trend for S&P 500 Index (Courtesy: www.EquityClock.com).
Also note in Figure 4 that stock market volatility has showed a historically seasonal tendency to spike higher starting at the end of June.
Figure 4 – Volatility “spikes” are not uncommon during the summer months.
h3 The bottom line is threefold:/h3
Get The News You Want
1) It pays to learn to recognize “the warning signs” and to act to hedge (or to do some selling) before the scary stuff starts to happen.
2) Given that it is a pre-election year (which tend to be bullish), I am willing to give the bullish case the benefit of the doubt.
3) In the meantime you might want to “strap yourself in”, it could be an interesting few months.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.