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Are the Dog Days of July And August Going to Slow Markets?

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July 6, 2016
Global stock earnings slows as market settles into summer trading pattern.

Are the summer doldrums ever going to set in this year? From frequently changing views on interest rates and the Fed to Brexit inspired stock market volatility, the summer doldrums haven’t really taken hold in 2016. Investors yearning for some R&R may actually embrace the potential for typical sluggish summer trading days ahead. Could July and August finally usher in some quieter trading? 

Since April, the S&P 500 has zigged and zagged, but largely held within a large trading range defined by roughly 2,125 on the upside and about 2,000 to the downside. The index has bumped up against its all-time high at 2,134, reached in May 2015, but has yet to hurdle that level. 

In the wake of the panic selling after the surprise Brexit vote and the subsequent recovery in the S&P 500, JJ Kinahan, Chief Market Strategist at TD Ameritrade sees potential for the market to finally settle into a summer trading pattern. "The initial Brexit scare is over. Now it may rear its ugly head every couple of weeks similar to what we saw with the Greek bank situation," Kinahan says. 

Wall of Worry: Presidential Election Looms

Kinahan points to the upcoming Presidential election in the U.S. as a major uncertainty hanging over the markets. "Until the election, it’s hard to see what might move the market out of this range," Kinahan says. 

Despite trading within a wide range, the S&P 500 remains within striking distance of its all-time highs. Sam Stovall, managing director at S&P Global Market Intelligence, is encouraged by the stock market's willingness to climb a significant wall of worry and actually stay within the range. 

"To me this is a sign that investors are looking for a catalyst to push prices higher. It also shows they believe that other investment alternatives are not sufficient," Stovall says. 

What are some of the worries that stock investors have climbed over in recent months? Stovall highlights a few here:

  • The S&P 500 is in an earnings recession
  • Weakness in the Chinese economy
  • Risk of recession in the U.S.
  • Weaker-than-expected May employment report
  • Federal Reserve might raise interest rates
  • Brexit 

Stovall says the market resiliency in the face of these factors keeps the possibility of new all-time highs in the forecast. "I do believe we will hit a new all-time high before we fall into the next bear market," Stovall says. 

Summer Time Investor To-do List

While you might have a "honey-do" list of items to fix around the house, there are some items you can put on your investing to-do list as well this summer. 

  1. Don't allow your emotions to become your portfolio's worst enemy, Stovall says. "If you are aware that volatility may lie ahead, it should stay your hand when you want to hit the sell button," he says. 
  2. Make a stock and fund shopping list. Consider using stock market price weakness as an opportunity to add to a portfolio, Stovall says.
  3. Play the range. Active investors frequently trade around a core position in stocks which tend to trade in a defined range, Kinahan says. For example: if an investor has 600 shares of one stock, and it moves to the top end of its recent range, they might sell 30-50% of the position. When it falls back down to the lower end of the range, the investor could buy back the full position, Kinahan says. This range trade opportunity does generate additional transaction costs and can only continue if a stock trades within a well-defined range. 

Boost Your Trading Acumen

Swim Lessons is trader educational programming, which TD Ameritrade clients can access live beginning 10:30 a.m. CT each trading day from the Support/Chat function within the thinkorswim platform.

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