By Colin Cieszynski, CFA, CMT, CFTe, Chief Market Strategist, CMC Markets
I’ve been saying for some time that through much of 2015, US stock markets have been undergoing a mid-cycle consolidation similar to 1994-1995 and 2004-2005. We had been working through the middle months, but recent trading suggests other years may provide even better examples of what we could expect in the coming weeks.
Historically, the mid-August to mid-October period has been the weakest time of the year for world stock markets. This isn’t the first time we have seen stocks slide in the summer, but with the Fed supporting markets through QE in recent years, it seems some traders have forgotten what summers can be like.
Bull markets can be seen as steady advances offset occasionally by steep but short selloffs while bear markets can be seen as steady declines offset occasionally by strong but short rallies.
Two mid-cycle summer selloffs that appear most similar to this year are the ones that took place in 2011 (on tighter US liquidity after the Fed ended QE 2) and 1998 (related to a crunch in emerging markets, particularly Russia).
The chart below compares trading action in the Dow Jones Industrial Average those two summers with this summer so far.
Source: CMC Markets
Results from 1998 and 2011 show that summer selloffs can unfold in two stages, an initial plunge of 10-15% in July or August, a moderate rebound as oversold conditions ease then a second decline into early October which retests the summer low followed by a recovery from late October through the end of the year.
We could see a similar pattern unfold through 2015.
This year’s selloff came a bit later but has not been any more severe than 2011 or 1998.
Monday’s selling climaxes have probably put in the 2015 lows for many markets but these could still be retested for confirmation in late September or early October.
Today’s strong rebounds may continue for a few days, but appear likely to fade before we get back to the levels seen last month.
Intraday volatility may remain high in the coming weeks as markets try to regain their footing in a time of uncertainty, potentially creating trading opportunities.
In addition to China’s ongoing market meltdown and its impact on currencies and commodity demand, speculation on whether the FOMC may start raising interest rates at its September meeting may also spark significant trading swings
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