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Even pros don’t know this about the market in August

August doesn’t reserve its bad reputation.

  • By Mark Hulbert,
  • MarketWatch
  • – 07/30/2014
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Get ready for one of the best months of the calendar for average stock market performance — August.

Surprised?

Welcome to the club. Like almost everyone on Wall Street, I bet you thought that August would be near the bottom of the monthly rankings. After all, the month comes right in the middle of the seasonally unfavorable six-month period that is often known as "Sell In May and Go Away."

And everyone "knows" that light trading volume — like what is experienced almost every August — isn't generally conducive to higher prices.

But try telling all this to the data. The accompanying table ranks all months for their average Dow Industrials (.DJI) return since that benchmark was created in 1896.

The average Dow return across all non-August months is 0.55%, less than half August's return.

How did August get its undeserved bad reputation? By focusing on too little history.

For example, since the mid-1950s August has been the third worst performing month of the calendar; only June and September have worse averages.

But it turns out that, prior to the mid-1950s, August was — on average — the very best month of the calendar. It wasn't even close, in fact: During the first five decades of the 20th century, the Dow did nearly six times better in August, on average, than during all other months.

This is, from a statistical point of view, a big red flag that we should not place too much weight on August's bad reputation that traces only to the more recent data. Unless we can tell a plausible story as to why August should have been a particularly good one during one five-decade period, and then turn around and be a below-average performer in the next five-decade period, then a statistician would dismiss the significance of the more recent data.

All of which adds up to good news for the month beginning this coming Friday, since the entire history of the Dow shows August to be an above-average month. This in turn means there's no seasonally based reason to expect this coming August to be a poor one for the stock market.

The bottom line? As the old saying goes, you shouldn't sell a dull market short.

This doesn't guarantee that the market will perform well in August, of course. But if stocks do decline over this coming month, it won't be because it's August.

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