Why is that people are always so surprised when stock markets decline?
We’ve had a rip-roaring bull market for years on end (granted, thanks primarily to an orgy of printed money, borrowed money and artificially low interest rates, all of which is almost certain to end badly at some point, but I digress), the market averages have been building classic multiple top formations for months (See Figure 1) and seasonally we are smack dab in the worst time of the year.
And then just as it has always done, the stock market experiences a decline and lots of people freak out! Oh well, same as it ever was I guess.
Figure 1 – Major long-term advance followed by an extended topping formation, followed by, well, what else?
Now I make no claims to have “called the top”, nor am I in the “wildly bearish” camp. My only point is that there has been ample warning that a pullback was quite possible. Investors and hedgers have had ample opportunity to act (to sell or hedge) and ample warning as the major averages struggled to make any real headway.
If you are new to the financial markets, I advise you to memorize the following. Look at Figure 2 and repeat after me:
Jays Trading Maxim #77: If price tries to breakout multiple times but fails, something bad usually follows. So don’t just sit around and wait for the “something bad.”
Figure 2 – When price tries time and to breakout but cannot the market is (usually) telling you something important.
Where we are Now, Seasonally Speaking
Figure 3 shows the seasonal annual trend for the S&P 500. Simply note that as I have discussed in the past, the end of May into September and October period is not typically “High Season” for the stock market.
In Figure 3 note the relative performance for the S&P 500 Index during the summer months compared to the rest of the year.
Figure 3 – Seasonal annual trend for S&P 500 Index (Courtesy: www.EquityClock.com).
Also note in Figure 4 that stock market volatility has showed a historically seasonal tendency to spike higher starting at the end of June.
Figure 4 – Volatility “spikes” are not uncommon during the summer months.
The bottom line is threefold:
1) It pays to learn to recognize “the warning signs” and to act to hedge (or to do some selling) before the scary stuff starts to happen.
2) Given that it is a pre-election year (which tend to be bullish), I am willing to give the bullish case the benefit of the doubt.
3) In the meantime you might want to “strap yourself in”, it could be an interesting few months.