Stock Trader's Alamanac: August Outlook

My friend Jeff and his team at Stock Trader’s Almanac put this out each month for their subs, it’s a really good contextual piece for all investors to be aware of.  Visit Stock Trader’s Almanac here.  And follow the Almanac Trader on Twitter. – Josh

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First Trading Day in August, Dow Down 10 of Last 15, But Up 3 of Last 5, Russell 2000 Up 6 of Last 8

Dow: 42.9% S&P: 52.4% NAS: 57.1% R1K: 52.4% R2K: 52.4%

“If I owe a million dollars I am lost. But if I owe $50 billion the bankers are lost.”
—Celso Ming (Brazilian journalist)

Psychological: Xanax, Please? Growth is slowing, the labor market is bobbing along, and housing is still in shambles. Normally, this would be sufficient cause for a bearish stance, but since the market bottom of 2009, this has been the criteria used by the Fed to send more liquidity into the financial system. When it arrived, markets soared. The threat to the downside is real, but fear of missing the next big Fed fueled rally is nearly as big. Could we just have more liquidity, please?

Fundamental: Dicey. Second quarter corporate earnings have for the most part bested a bar that was just slightly above ground level, but revenue growth has been lacking. Cost cutting and productivity gains can not improve the bottom line indefinitely. Each laid off employee is going to be one less consumer with money to spend. Second quarter U.S. GDP of just 1.5% is far less than needed for a healthy labor market and solid corporate revenue growth.

Technical: At Resistance. Respectable June and July gains have lifted DJIA back above 13,000 and within 200 points of a new recovery high, but momentum is fading. The S&P 500 and NASDAQ are even further below their respective previous highs. The two-month trend has been up, but until the major indices can all break out to new highs, it is still early to call the all-clear.

Monetary: 0-0.25%. Bold words have been spoken and the market awaits follow through. The Fed has proven quite predictable since August 2010 when QE2 was first eluded to at Jackson Hole, but the global economy’s real issue is with Europe’s debt crisis. Our Fed cannot fix Europe’s woes, at least not openly. Will the ECB deliver is the question that remains unanswered. Considering its track record and the political roadblocks it faces, recent bold words could likely turn out to be just hot air.

Seasonal: Bearish. August is the worst DJIA, S&P 500, NASDAQ and Russell 2000 month since 1987 with average declines ranging from 0.5% for NASDAQ to 1.2% for DJIA. However, in presidential-election years since 1952, Augusts’ rankings improve significantly to: #4 DJIA and S&P 500 and #1 NASDAQ (since 1972) and Russell 2000 (since 1980). Significant gains in 1984 and 2000 constituent the majority of the improvement in the rankings.

Source:

Market at a Glance (Stock Trader’s Almanac)