Don’t Be Lulled By the Dog Days of August
It’s vacation time for many, but the markets don’t rest. Let’s look back at several historic Augusts that began quietly and ended with volatility.
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We are clearly into the Dog Days of August, with volumes in the market trailing off like it’s a holiday. But it also occurs to me, there have been a number of times that August has had a big move.
For example, way back in August of 1982, the bull market kicked off. That was a good time to be around in August. In August 1990, Iraq invaded Kuwait, and the month of August was not great.
I can also recall the summer of 2007, months before the peak in the market (October), we had a wild ride where we plunged and rebounded as the Fed saved the day.
In August 2010, we were heading down when then Fed Chair Bernanke announced QE2 at Jackson Hole, and while technically it wasn’t really August, the low was made, and off we went.
I am certain there were many other times that August started out dull and somehow something came along to shake things up. I would suggest, despite the dullness that seems to have settled in on Monday, we should not get lulled into thinking the entire month will be dull too.
For starters, the market gets overbought midweek (this week). You can see the Overbought/Oversold Oscillator has already ticked down, although I expect it will have one more push up (it’s the math).
Then there are the stocks making new lows on the NYSE. They scurried up to 85 on Monday. That’s something to put on the radar because expanding lows and (still, so far) contracting highs is not a great recipe.
And of course, there is the sentiment. I am still waiting to see if Wednesday brings us the Investors Intelligence Bull to Bear Ratio that ticks anywhere near 4.0. Recall it is currently 3.63, so it won’t take a whole lot to get it to 4.0, and that is my line in the sand. For me, that is where I say, we’ve gotten folks giddy.
The ten-day moving average of the put/call ratio has ticked down a bit more, now residing around .86. A reading under .85 would signal folks are no longer skeptical. A reading under .80 would tell me they have gotten giddy.
I know someone will surely ask me what could make the market get volatile, and the answer is, I have no idea. If I knew then, it would probably be priced in already. It could be energy, a currency, interest rates, or none of those things.
But the VIX is low, and its DSI is 17. And that means it goes on our watch list for a sign of volatility picking up. Especially if we get one more push higher, and that DSI falls to 15 or below. My best advice is don’t be lulled by the Dog Days of August. Especially since the Market Vane Bulls are now at 79%, the highest reading since June 1997.
Oh, and that August? That was the kickoff of the Asian currency crisis, although our markets did not care until October when the S&P fell 15% in three days. I don’t believe I have ever seen so many bulls jump the fence to the bear camp so quickly. Of course, that marked a low.
