Images of long days, vacations, and a slower pace of life are what come to mind when one thinks of summer. At the same time, however, the summer market is a season that presents both opportunities and challenges for dealers.
Despite the fact that there is a possibility that trading volume will decrease, which might result in higher volatility, there are also certain techniques and factors to take into account to capitalise on summer market price movements. In addition, July has been a positive month for the American market. Nevertheless, it is possible that the surge it has seen may not endure as long as it does during other periods of the year, especially during election year.
Let’s take a more in-depth look at the ways in which you might improve your chances of successfully navigating the summer markets in the United States.
Building on a solid first half that was mostly driven by technology companies, the stock market in the United States looks to be on its way to experiencing a potentially strong summer. But this might change with the impending election in 2024, which has traditionally been known for causing high levels of volatility.
According to statistics provided by Dow Jones Market Data, the month of July has established itself as the month with the highest average performance for the S&P 500, delivering an average gain of 1.7%. More than 60% of the time, the S&P 500 index concludes the month of July with a higher value.
Additionally, the Dow Jones Industrial Average has also consistently seen a historical increase in the month of July. Since 1897, the DJIA has been averaging a monthly gain of 1.4%, and has seen positive returns in July around 65% of the time.
Even if the historical patterns for the month of July present a bullish picture, there are a few elements that might disrupt this positive pattern. These considerations include record highs on Wall Street and anxiety over the presidential election year.
Currently, the stock market in the United States is hovering around record highs. Despite the fact that this may be interpreted as a positive sign, it also indicates that there is less potential for growth over the short-term.
Additionally, the S&P 500’s recent performance is raising concerns about a lack of market breadth and a concentration risk. Only 10 stocks hold a hefty 33% weight in the index, a level of concentration only seen 3 times in the past. This concentration poses a significant risk, as the performance of a few companies can disproportionately impact the entire index.
There will also be a significant amount of uncertainty leading to the result of the impending election in 2024, particularly with the Trump and Biden rematch. Election years are typically characterised by higher volatility as a result of investor reactions to policy proposals and the possibility of leadership shifts.
One significant hurdle of summer trading is the drop in trading activity. Institutional investors and seasoned traders take vacations, leading to a relatively deserted market environment. This lack of participants can create unforeseen price movements.
Adding another layer of complexity is the impact of summer weather on specific commodities. Demand for some commodities fluctuates based on the season.
For instance, gas prices typically decline during the heating season. Conversely, travel-related commodities like oil often see a price increase due to summer vacations. Traders need to factor in these seasonal trends alongside other market forces, making summer a time for strategic adaptation.
Finally, summer heat can even have a psychological effect on traders. Reduced focus and energy levels can lead to impulsive trading decisions. The allure of the beach and the excitement of major sporting events during summer can further distract traders and pull their attention away from crucial market movements and opportunities.
Summer’s unique market conditions call for some adjustments to your trading approach. Here are key considerations for maximising your success during the warmer months:
By following these few summer trading tips (among others), you can adapt to the unique market conditions and potentially achieve success during the warmer months.
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Carolane graduated with a Masters in Corporate Finance & Financial Markets and got the AMF Certification (Financial Markets Regulator in France). Afterward, she became an independent trader, investing mostly in European and American stocks/indices.