The first point of note is the recent phenomenon for such drops; looking at the data back to 1950 the greatest number of occurences were in the current millenium: 2008, 2007, 2002, 2001, and 2000; 2002 was unusual in there were 8 days in July which registered daily drops of 2% or more. 'Black Box' trading, broadband connections, electronic exchanges all feed into this increased volatility. Going back further we have 1999, 1998, 1996 - effectively the advent of online trading; 1996 had two days in July which experienced 2% losses.
It's not until you enter the time machine that we see truer points of market weakness, namely 1986, 1974, 1969 and 1950 - 1974 having two days of 2% losses.
What has resulted from these 2% July down days?
For the past ten years the outcome has been mostly negative with markets conforming to seasonal patterns (i.e. weak September and October). In 2001 and 2002 the 2% down day occurred around the July bank holiday weekend. Markets generally struggled to maintain bullish momentum over the rest of the summer with profit taking acclerating losses into the Fall. In defence of the bull cause, 1999 and 2002 were more range bound than disasters but holding stocks was not the favoured course of action.
Also, bulls can take comfort from 1996 and 2007 when the markets continued to work higher - although both occurrences were during cyclical bull markets, not the cyclical bear market we are currently experiencing.
However, pre-online trading the impact of the 2% down day was not so bad. Of the four years with July's containing a 2% loss there were two gains and two losses (or one gain, one loss and two sideways markets). In 1974 and 1986 the 2% down-day occurred close to the July bank holiday.
In summary, a volatile summer trading day loss has been up to the advent of online trading a rare and non-impactal event. However, in the world of online trading, black box systems, and fine margins (the latter in particular), these 1-day events have been used as cues to adopt a negative stance on the market; namely sales of existing holdings, opening shorts and holding off new buys.
In light of this it would be prudent not to fight the crowd, and instead adopt a wait-and-see approach into the seasonally weak September-October period. Perhaps then, better longside opportunities will emerge.
Dr. Declan Fallon, Senior Market Technician, Zignals.com the free stock alerts, market alerts, and stock charts website
