August/September – Play it Safe or Swing for the Fences?

We are entering an “interesting” time of year for investors (Unfortunately, that’s “Interesting” as in the ancient Chinese curse stating “May you live in interesting times”).
Now I personally I have no idea if the stock market is going to break out to the upside and rally to further new highs or if this latest lull will be followed by a painful reversal of fortune.  I am willing to play the long side as long as things are holding up/moving in the right direction.  But investors should be aware that the August/September timeframe is the “Danger Zone” for the stock market historically.
August/September Historically
Figure 1 speaks for itself.  The chart displays the growth of $1000 invested in the Dow Jones Industrials Average only during the months of August and September every year starting in1934.
Figure 1 – Growth of $1,000 invested in Dow Jones Industrials Average (using price data only) ONLY during August and September; 12/31/1933-present
Two key takeaways:
*The net result has been a loss of -53% or the past 82 year.  Not exactly the kind of returns most of us are looking for.
*Despite the negative net results, the fact is that the Aug/Sep period has showed a gain more often (45 times) than not (37 times).
So while caution appears to be in order, no one should assume that the next two months are doomed to show a loss.
Stocks versus Bonds
Figure 2 compares the performance of:
Ticker VFINX – Vanguard S&P 500 Index fund
*Ticker VFIIX – Vanguard Mortgage Bond Fund
(*VFIIX is used as a proxy for intermediate-term treasuries as it has a high correlation to IT treasuries and a longer data history.  Any short-to-intermediate term treasury fund or ETF would likely produce similar results)
The test starts in 1980 (when VFIIX started trading) and shows the total return for buying and holding each fund ONLY during the months of August and September each year since.
Figure 2 – Growth of $1,000 invested in VFINX (stocks; blue line) versus VFIIX (bonds; red line); August 1980 to present
So what will it be this year?  A breakout to new highs?  Or something much worse?  I wish I could tell you the answer.  But at least now you have some information to help guide your “speculative” versus “conservative” instincts in the months ahead.
Jay Kaeppel
Chief Market Analyst at and AIQ TradingExpert Pro ( client

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