The Market Could Disappoint Bears Forecasting Huge Pullback Ahead Despite August Slump

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We are now past the mid-point of the Dog Days of August, and so the stock market is where the bears think it should be – down and sinking. The Dow and S&P 500 are down nine out of the past sessions. So those who have been clamoring for a sharp pullback are probably starting to feel very pleased and comfortable – and expecting more declines ahead. 

But don’t discount the possibility that this August month may still end up disappointing the big bears. The market by month’s end could produce an upside worthy of a reversal of fortunes.

True, the S&P 500-stock index’s price change in August has been the third worst since World War II, according to the S&P Capital IQ, dragging down nine of the index’s 10 sectors, and more than 70% of its 132 sub-industries. The worst hit have been the financials, telecoms, and industrials.

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The market’s decline, after the S&P 500 had surpassed its high mark of 1,700, was expected by most market watchers. But the bulls don’t expect an imminent pullback of 10% or more. The reason: The market has already seen its traditional summer swoon.

The S&P 500 has already declined 6% from May 22 through June 24, not including the further drop in July and August. “History says (but does not guarantee) that the odds of a second summer swoon are low,” says Sam Stovall, chief equity strategist at S&P Capital IQ. So he expects the market won’t do a “summer double-dip” this year.

The month of August this year may not end as badly as the bears predict. “History shows this year could be an exception, since we already have endured one summertime swoon,” he asserts. Since 1945, the S&P 500 saw the start of a decline in excess of 5% during 33 of the 67 summers (the five month period of May through September). However, only four times – 1967, 1986, 1999, and 2009 – did the S&P begin a decline of 5% or more twice, says Stovall.

“So, while there is no reason the S&P 500 could not endure a fifth summer of back-to-back declines, the likelihood of avoiding a double dip are encouraging at more than 87%,” says Stovall.  

Let’s look at the record. Since 1945, while the greatest number of pullbacks started in May and March, with eight and seven, respectively, August was tied with October for third place with six. The largest number of corrections, notes Stovall, started in April, July, September and October, while May, July and August were tied for second.