August Seasonality
Indicator of the Week

August Seasonality: A Bullish Approach!

by Ian Harvey

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August 06, 2012

Introduction

With the move into August there is hope that the stock market will make it three straight positive months after the Standard & Poor's 500 Index (SPX) gained 4.0% and 1.3% in June and July, respectively. Obviously there will be quite a lot of investor nervousness due to past August seasonality performances.

August last year saw the SPX suffer a loss of 5.7%, which at the time was the worst single-month return in about two-and-a-half years. Furthermore, from a longer-term perspective, August is not regarded as a bullish month. In fact, the table below reveals August as the third-worst month as far as average return goes, trailing only September and June.

While now is not typically a bullish time of year, there are some reasons this August may be different from the past.

Two-Month Time Frames

As can be observed from the table above, September has typically been the worst month of the year for the market and August seasonality becomes apparent. When you combine that with the barely mediocre returns of August, you get the worst two-month period of the year for the SPX. The table below shows the August-September period is the only two-month time frame averaging a negative return.

Reasons for a Bullish August

The tables above certainly display some bad news, but there are a couple of reasons to have a bullish August:-

• One reason this August may be different from other years, however, is that this is an election year – and during election years, August is the best month of the year for the market.

• Another reason to be bullish can be noted by breaking the last 30 August returns into three equal groups -- depending on the percentage of investors who were bullish heading into the month -- according to the sentiment survey published each week by Investors Intelligence.

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TOP OPTIONS TRADES SINCE JUNE 01, 2012

TRADE GAIN TRADE GAIN
HLF July 47.50 Calls 53% APPL Aug 650 Calls 67%
DLTR Aug 110 Calls 32% UIS Oct 17 Calls 79%
HSY Aug 70 Calls 56% TSO Nov 25 Calls 54%
NKE Oct 92.50 Calls 49% HLF July 47.50 Calls (again) 38%
FB Aug 25.00 Puts 500% DISH Sept 30.00 Calls 100%
APPL Jan 13 650.00 Calls 71% CSTR Oct 42.50 Puts 400%
LNKD Aug 92.50 Puts 30% LNKD Aug 100.00 Calls 250%

In the most recent survey, about 39% of investors were considered bullish, which is historically a pretty low figure and would place it in the lower third of August seasonality readings over the past 30 years. Looking at the table below, that would put it in the "Fewest Bulls" bracket, or where investors are most pessimistic. In those cases, look at how impressive the returns are! August averages a 2.56% return and is positive 80% of the time. In other words, August is typically a bad time to own stocks unless everyone expects that it's a bad time to own stocks.

Further Articles Relating to the Week Ahead

1. The Week Ahead in the Stock Market - August 06, 2012

2. The Economy and Earnings in the Week Ahead – August 06, 2012

3. The Past Week Stock Market Results – August 06, 2012

4. The Major ETFs in the Week Ahead – August 06, 2012


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