It also means traders take vacations and focus on rosé rather than trading. And we can see that in last week’s trading.

The Big Money Index, which tracks the buys and sells in stocks fell hard. That’s because of a rotation out of small-cap stocks and into growth and Technology.

Even with the S&P 500 making all-time highs, under the surface of the market tells a different story. Not all stocks are ramping. We can clearly see this with the BMI falling last week.

As a reminder, the BMI tracks buying and selling in stocks. If it’s falling, that means the number of stocks getting bought is slowing…and the number of stocks getting sold is gaining. You can see off to the right in the chart how the blue line pulled back:


As big-cap tech stocks gained, small-cap stocks fell. That’s what put pressure on the BMI.

But this action doesn’t surprise me. Summer months tend to bring volatility. As I’ll show you, that’s only half the story. Because after the summer months, there tends to be what I call the green zone for stocks.

Last week I did a study looking at how July and August tend to perform. I went all the way back to 1996, plotting the monthly returns for the S&P 500 (SPY ETF). Check it out:

Looking above it’s clear to see that July has been positive just over half the time and August tends to have a negative performance. Then in the right column I plotted the months together: July and August in general are rather unexciting times for stocks.

But, that’s only half the story. You see I went and checked out how September – December tend to perform. And historically, those 4 months are mega-green. Have a look:

Off to the right I added the average 4-month return of September – December. That’s juicy! And I want to point out that comparing a 4-month return to a 2-month return is not an apples-to-apples comparison. But it should showcase that the end of the year is usually a good time for stocks.

So let’s wrap this all up.

Story continues

The bottom line is this: July and August tend to get bumpy for stocks as liquidity is thin. But, hang in there because September – December usually see green.

I think it’s a great time to start getting a buy list together just in case stocks fall due to the liquidity vacuum of summer. Sometimes Christmas comes in July.

Disclosure: the author holds no position in SPY or the S&P 500 at the time of publication.

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This article was originally posted on FX Empire


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