Yesterday, we explored the historical cycles of the stock market. I showed that a composite of the one-year seasonal, the four-year Presidential, and the ten-year decennial cycles projects a nasty decline could begin any time now. However, I opined that since the market seems to be on good footing at the present time, a bearish catalyst would likely be required to get a bear party started.

On the other hand though, it is important to recognize that sometimes themes/trades in the stock market become self-fulfilling. In other words, if Wall Street traders are all thinking the same thing at the same time, the trade can, and often does, play out as expected.

Note that I am not talking about a long-term, macro-type theme or trade. For example, most everybody on the planet has been looking for rates to rise and for a big, bad bear to begin in the bond market ever since the "taper tantrum" began a few years back. And yet, with inflation remaining stubbornly low and the economy stumbling along, the rising rate trade hasn't materialized.

However, as opposed to a trade that is based on analyst prognostications about what will happen in the future, the projection for a meaningful stock market decline to occur within the next 3-4 months is actually rooted in history.

You see, August tends to be a pretty crummy month for the stock market. According to Bespoke Investment Group, August has historically been a weak month as the S&P 500 has averaged a 1.4% decline over the past two decades.

And over the last fifty years, the WSJ tells us that an investor who decided to invest $100 in the S&P 500 and leave it there only during the month of August, would now have just $98. Contrast this to a similar approach of investing only during the month of December. That same $100 invested only in December, which happens to be the best month for stock market performance historically, would be worth $204 over the half-century span. As such, one can argue that there is definitely something to be said for paying attention to seasonal tendencies when investing in the stock market.

Lest we forget, September hasn't exactly been a great time to be invested in stocks either. In fact, the WSJ says that over the last fifty years, S&P returns in September have been even worse than August. Oh, and then October tends to be a time when the bears shine as history shows a preponderance of "crashes" have taken place during the month.

But before you run out and load up on those inverse stock market ETFs, let's remember the age-old Wall Street saw, which states, "something everybody knows isn't worth knowing."

While I can certainly be accused of talking out of both sides of my mouth here, I have to admit that I have become alarmed by the number of emails, analyst notes, and webinars promoting the weak seasonality theme. Yesterday alone, I received four communiques talking about how the stock market tends to stink up the joint in August.

So... Will stocks follow the traditional pattern that most everyone seems to be looking at? Or will Ms. Market simply ignore the seasonality and continue to march merrily higher in a long, slow, stair-step fashion on the back of tax reform hopes?

Frankly, I have no idea what the answer is. But I think the way to play things here is to (a) recognize that "if" (key word) a meaningful decline is going to occur in the near-term, history suggests that now is the time and (b) be ready to buy the dip. Remember, the best time to be invested in the stock market historically has been from the October/November low through April of the following year.

For me, this means that I'm happy to take a little less risk here (just in case), to be on the lookout for any bearish catalysts, and to be ready to buy that dip (if it occurs, of course!).

Thought For The Day:

Make sure your worst enemy doesn't live between your own two ears. -Laird Hamilton

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

1. The State of the U.S. Economic Growth (Fast enough to justify valuations?)

2. The State of Earnings Growth

3. The State of Trump Administration Policies

4. The State of Fed Policy

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.

Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

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