Trading in August: What to Watch Out For
August is summer, and summer is known for lower volumes in the financial markets, so what makes August such a special month for traders and especially stocks?
Stay on High Alert When Trading in August
Not everything is as it seems, so just because there is less trading in August doesn’t mean traders can sit back and relax. A lack of volume can trigger heavy volatility in the market if a large trade is made, this is especially true when it comes to the stock market, where one investor could buy or sell millions at a time, causing an unexpected spike or crash.
Black Monday
The events of two years ago are a perfect illustration why August is a month to be feared. The Chinese central bank’s first currency devaluation in two decades sparked a chain of events that eventually led to the “Black Monday” crash of 24 August 2015. On that day, trillions of dollars were wiped from the global financial system as volatility spiked to recession levels.
When it was all said and done, worldwide markets lost more than $5 trillion between the 13the and 24th of August – the period between the yuan devaluation and Black Monday.[2]
History Doesn’t Lie
Analysts have described August as a historically challenging month. The risks are amplified this year as stocks reach dangerously overvalued levels.
History certainly doesn’t lie. Since 1945, the U.S. benchmark S&P 500 Index has lost an average of 0.2% in August. The month has been an even bigger headache recently, with the Dow Jones Industrial Average losing an average of 1.1% since 1987.
What’s more, August was the month of the second-worst ever drop in equities. In August 1998, the S&P 500 lost nearly 15% in just four weeks.[3]
Investors hoping for a quiet end to summer should take a good look at history before relaxing too much. If August tells us anything, it’s that the summer overhang will continue into September. Even worse, these historically difficult months give way to October, which has seen its fair share of absolutely epic market crashes. The Wall Street Panic of 1907, the Great Depression of 1929 and the Black Monday crash of 1987 all took place in October.[4]
[1] Jim Lowell (8 July 2013). “Low volume and high volatility: how to profit.” MarketWatch.
[2] The Economist (24 August 2015). The causes and consequences of China’s market crash.
[3] Paul J. Lim (4 August 2017). “Stocks just entered a historically scary period. Here’s why.” Time.
[4] Paul J. Lim (4 August 2017). “Stocks just entered a historically scary period. Here’s why.” Time.
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