Wednesday, August 9, 2017

Dog Days of Summer

Looking at August Data:
  • Last 20 years: August ranks dead last in monthly performance with an average loss of 1.31%
  • Last 20 years: The average daily trend starts weak and finishes weaker
  • Last 20 years:  The August through October 3-month rolling return is typically weak with an average gain of just 0.02%
  •  Last 20 years:  Further, August through September is the worst 2-month stretch on the calendar as both months have averaged losses.
  • Since 1950:  August is second to last in monthly performance with an average loss of 0.09%
  • Since 1950:  If the S&P is up greater than 10% through July, August has an average loss of 0.83%
  • Since 1950:  If the S&P is up greater than 10% through July and July was positive, August has an average loss of 0.24% with an average gain of 5.78% for the rest of the year

This leads us to the question of where does the market go from here?   If we knew with certainty, we'd all be a lot wealthier...  Without the superpower of clairvoyance, we choose to look at historical data and to help us make educated bets.  

As we've mentioned before, we think the market remains firmly in a secular bull market.  Yet with all bull markets there are always pullbacks and corrections.  Per this Ryan Detrick tweet the current streak of 9 months without a 3% pullback for the S&P is the second longest since 1950.  This confirms our own data that we touched on in our last blog post about the length without a 5% correction.  Does this mean we are guaranteed to get a correction any time soon?  No, but the historical data makes the case that the market is past due and to be on alert for a potential fade.  

One of our favorite weekly reads is from Jeff Saut at Raymond James and his latest investment strategy letter had some great wisdom: 

The call for this week: The D-J Industrials have made new all-time closing highs for eight straight sessions and have made 34 all-time highs year-to-date. Still we keep hearing, as we have for years, “There is a stock market crash coming soon.” However, history shows stocks NEVER crash from new all-time highs without giving participants a chance to adjust portfolios. In 1929 the Dow made a new all-time high on 9/3/1929, but the crash came months later (October 28/29th). In 1987 the Dow made a new all-time high on 8/24/87, but the crash arrived on October 19, 1987. Moreover, as our friend Tony Dwyer (Canaccord Genuity) writes: 

Think about all the non-recession 10%+ corrections over the past 25 years. Don’t they all start with an overbought condition, too much optimism, and a sense that a correction is overdue and should be bought? How then is one to determine if the correction would likely be temporary or something more significant? History serves as a great guide – even in the current cycle. Significant corrections, even if temporary, come with the perception of a probable recession. The two major corrections over the past 7 years (2011 & 2015-16) were associated with a global crisis that could have put the sluggish U.S. economy into recession. There is no sign of any significant deterioration in the (1) global synchronized recovery, (2) U.S. economic reacceleration, or (3) credit market environment that should create the fear of recession. As a result, we expect any correction to provide a better entry point for a move to our 2018 S&P 500 (SPX) target of 2,800 with a focus in the “pro-growth” sectors. 

In summary, we are of the view that barring any major geopolitical risks, we want to be buyers into weakness.  We have recently raised some cash as we head into the most challenging 2-month stretch of the last 20 years to hopefully exploit such an opportunity.  Couple this historically weak period with the length and persistence of the current up-move without even a mild pullback and we believe there may be better opportunities for entry over the next few months.  

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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