Preparing For The Dog Days of Summer

My mentor from summers working on the Boston Stock Exchange, Geno Eng, used to always remind me of one simple fact of trading. “Markets go up, markets go down.” He repeated this mantra consistently, which is what helped him survive, and actually make a good profit, when the market crashed in the fall of 1987.

If Geno were still trading today, I’m sure he’d repeat this mantra, but likely shaking his head in disgust. Because, as the chart below clearly shows, this market has been going in one direction for a very, almost inconceivably, long time.

The current rally has made this bull market the second longest running bull market in history, surpassed only by the years 1990 – 2000. And, we all know how that ended. Speculative bubble followed by epic crash.

So, am I predicting an end to the bull market? Not at this time. My belief is that the world is awash in speculative capital. Meanwhile, Central Banks remain unconcerned about deflation and will cut rates or provide liquidity every time there’s an inkling that markets are under significant pressure. Therefore, I remain bullish on US and, even more so, global markets.

That doesn’t mean, however, that there can’t be down days, weeks or even months. When markets go straight up, and everyone in the bear camp is either silent or forced to surrender, stocks become ripe for a correction of some kind. When headlines like the one above, from the July 21st edition of The Wall Street Journal, start appearing, it makes sense to pause and reexamine your portfolio.

This is particularly important as we enter the months of August and September. These two months have historically been the weakest. And, looking at the S&P 500’s performance in the years 1980 – 2016, August and September are down months on average. They are also the only two months that have a negative average performance.

Therefore, as we enter the month of August…When every trader is likely to be thinking about the Hamptons. When valuations of the FANG stocks and Bitcoin and other speculative investments get stretched thin. When recent IPOs like SNAP and APRN fall on their faces…perhaps it is time to be less aggressive with your portfolio? Take a little off the table? Keep some dry powder?

Another old saying is that “markets can stay irrational longer than you can stay solvent”. I feel that this is happening/has happened to the short sellers. When they give up, I’m worried.

Two things I know for certain are that markets are cyclical, and that Geno Eng was right; markets do go both up and down. We are entering the two weakest months of the year and history does tend to repeat itself.