August: How hot will it get?

August 1, 2015 09:00 AM

Money flows from harvesting made August a great month for stocks in the first half of the 20th Century. It was the best month from 1901 to 1951. In 1900, 37.5% of the population were farming. Now that less than 2% of the population farm, August is among the worst months of the year. It was the worst month for the Dow Jones and S&P 500 indexes from 1988-2014, with average declines of 1.1% and 0.8% respectively. August also is bad for the Nasdaq (–0.1%) and the second worst month for the Russell 2000 (–0.5%) during that time. But in pre-election years since 1950, August’s rankings are better. 

Contributing to the poor performance were turmoil in Russia (1987), the Asian currency crisis (1997) and the Long-Term Capital Management (1998) debacle with the Dow shedding 6.4% in one day. In August 2014, the Dow dropped a record 1344.22 points (15.1%), which was the second-worst monthly percentage loss since 1950. Then in August 1990, Saddam Hussein triggered a 10% slide. The best Dow gains occurred in 1982 (11.5%) and 1984 (9.8%) as bear markets ended. Down moves of more than 4% in 2010, 2011 and 2013 widened August’s losses. 

The first nine trading days of the month have exhibited weakness while mid-month is strongest. Note the bullish cluster from August 14-19 (right). The end of August tends to get whacked as traders evacuate Wall Street. The last five days have suffered in 13 of the last 19 years with the S&P 500 up only four times on the next to last day in the past 19 years. The last five days of August have averaged losses of: Dow, –1.3%; S&P 500, –1.2%; Nasdaq, –0.9% and Russell 2000, –0.3%.

On the Monday of expiration, the Dow has been up 13 of the last 20 years, more than 1% in four of them; while on expiration Friday it has dropped four of the last five years. Expiration week as a whole is down slightly more than half the time since 1990, but some of the losses have been steep (-2.6% in 1990, -2.3% in 1992, -4.1% in 1997, -4.0% in 2011 and 2.2% in 2013). The week after expiration has been up 15 of the last 25.

About the Author

Christopher Mistal is the director of research for stocktradersalmanac.com, which identifies market opportunities based upon historical patterns and market seasonality in conjunction with fundamental and technical analysis. 
@AlmanacTrader