I don’t know who will be elected president, but I already have a proposal for him or her:
Can we just close the stock market in August and September?
I’m kidding, of course. Sort of.
I’m not the only one in favor of this idea. My friend Louis Navellier is on board, and I don’t think it would take much effort to get most of Wall Street to hop on the bandwagon. Most of those pros are out of town in August anyway.
Summer is supposed to be the slower-paced relaxing time of the year, but August and September do a pretty good job of raining on that parade. And it looks as if this year will follow the script.
On Aug. 1, the S&P 500 slid 1.4%. On Aug. 2, it fell 1.8%. And today, after what must have been a lousy weekend, the benchmark index fell more than 3%.
I rest my case.
But I know the market won’t close, and as appealing as it might be to do your version of a close and sell stocks, chances are that would be a big mistake – provided you own high-quality stocks to begin with.
The data tells us we should expect this every year. The headlines may change, but the pattern almost always holds.
And in the long run, that’s not just a good thing, it’s a great thing.
What to Do Now
A lot of the money flowing out of stocks right now is the Big Money, but Joe and Josephine Investor, too, often get caught in the tide and swim for shore.
My first and possibly most important piece of advice to you is this: Think long and hard about selling high-quality stocks. You might be playing into Wall Street’s hand and leaving money on the table, as there’s a high probability that most quality stocks will charge higher when money starts flowing in again.
I know it can be tempting to sell and get out of the water altogether, but that’s an emotional reaction, not a calculated one. I’ve shared before how emotional decisions blew up my portfolio when I started investing, and that planted the seeds for my system. I wanted to make rational decisions based on data, not my gut, fears, greed, or anything else.
I’m glad I did.
During the summer, especially when volume drops, Wall Street’s algorithms take over even more than usual. And do you know what those algorithms do? They drive prices lower to flush out the “weak hands”… and then the Big Money eventually buys these stocks again.
Summer is historically volatile to begin with, and election years are extra volatile as uncertainty over which candidate will win puts additional pressure on markets. This year, we can add in geopolitical tensions, investors’ obsession with interest rates, and recent weaker-than-expected economic data that fanned the flames of recession concerns.
But it’s not just this year. More than 30 years of stock market data confirm that August and September are easily the weakest months of the year.
Source: FactSet, MAPsignals.com
You want to keep our focus on that green shaded zone, which highlights the fourth quarter as far and away the strongest of the year.
Even more importantly here in 2024, that seasonality dovetails with established election-year patterns. Volatility in election years tends to kick up around this same time as we get within about three months of voting day.
The reason is simple: Wall Street hates uncertainty. When polls are close, as they are now, Wall Street takes money off the table to reduce risk. Money flows out for a time instead of in. I could show you Big Money Index (BMI) charts going back more than 30 years, and they all strongly resemble this one from 2012:
Source: MAPsignals.com
That yellow line is my proprietary Big Money Index. When it is rising, money is flowing into the market. When it is falling, money is flowing out. You can see it fall sharply beginning in August, and you can see it rise sharply as the outcome became clear.
We see this almost every election cycle, no matter who the candidates are, and no matter which party ultimately wins.
I think the biggest catalyst for today’s selling didn’t even happen in the U.S. Japan raised interest rates from 0% to 0.25%, and its Nikkei 225 index crashed 12.4%. That spooked the entire world, and it also called into question an important “carry trade.”
Investors could borrow money in Japan at essentially a 0% rate and use it to buy stocks. And as we know, the darlings of Wall Street, up until recently, have been the mega-cap bellwethers that ran so high there was no longer any margin for error. They were priced for perfection, so even the tiniest slipup in earnings resulted in outsized selling. (Just look at the Magnificent 7 stocks.)
This just accelerated the trend we’ve seen since mid-July with flowing out of large tech stocks and rushing into small-caps. That widened market breadth, and though small-caps also get hit in broad volatility, improved breadth would be healthy whenever stocks start to run into the end of the year.
Stay prepared for more summer volatility. Take some more antacid if you need to. But stay focused on what’s to come. Rates are set to fall, the economy is not in a recession, and the election will resolve by November at the latest.
These weakest months of the year are not the time to panic and sell high-quality stocks. And that brings me to my second piece of advice: They are the time to take advantage of deals on great stocks, especially ones with expanding sales, earnings, and profit margins. And, of course, those essential Big Money inflows.
Big Money may be taking away right now, but that’s by design. It will be buying many of these stocks again in the coming months.
Talk soon,
Jason Bodner
Editor, Jason Bodner’s Power Trends
