Could Stocks Suffer a Hangover After a Volatile Summer?

AdamBullish investors are counting down the days until November 1, when the stock market’s “sweet spot” returns.

But they may be disappointed this year, as 25 years of evidence suggests stocks could suffer from a nasty “hangover” following a volatile summer.

You see, the “Sell in May and Go Away” adage essentially divides the calendar year in half, then shows that stock market returns between May and October (the “go away” period) are weaker than returns from November to April.

So investors have been conditioned to expect great things from the market, beginning in November.

But my research shows that not all November-to-April periods are created equal.

Specifically, the stock market tends to underperform following a volatile summer ­– like the one we just had – compared to a quiet summer.

Here, I define a “volatile summer” as one in which volatility has spiked by 50% or more between May and October. Over the past 25 years, that’s occurred roughly half the time.

And it seems stocks tend to suffer from a lingering “hangover” following those rocky summers, as returns have historically been weaker and more volatile.

Take a look at this performance summary table, showing the difference in two-month returns following quiet summers and volatile summers:

Returns Tend to Be Worse Following a Volatile Summer

Clearly, the stock market has underperformed in the aftermath of volatile summers. But it’s also been more susceptible to a sharp sell-off in November and December.

For example, the S&P 500 lost 10.2% between November 2007 and the end of that January – on the heels of a volatile summer.

And in 2008, stocks lost 9.9% during the last two months of the year – again, in the wake of a volatile summer.

That sure sounds like a miserable summer hangover to me!

And it makes a lot of sense…

Investors are naturally more hesitant after getting smacked around by volatility. They might buy stocks… but they’re nowhere near as aggressive in bidding up prices.

Of course, this research in no way guarantees we’ll see lower prices by the end of the year. No historical study can determine with certainty what will happen this time around.

But it does warrant a neutral or bearish bias, and suggests it’s far too early to get excited about bullish opportunities.

Adam O'Dell

Adam

Chief Investment Strategist, Dent Research

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Categories: Stocks

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.