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TheStreet Open House

The Science Behind the Stock Market Summer Slump

NEW YORK (MainStreet) — The summer tends to be a more lax time of the year, where the market isn't as volatile and investors aren't necessarily on their A-game. Most of the Wall Street tycoons are worried about their Hamptons plans, and the regular small investor is left out to dry. Although the prevailing wisdom advises to "sell in May, and go away," there are some ways to combat the slow market this August.

Read More: How 401(k) Investors Can Beat a Bear Market

Due to low volatility, and more or less lower prices, small investors should be bullish. The September market is usually a more turbulent and volatile market, so many traders buy now and hold until the beginning of the fall. One of the techniques I use in a slow market is to trade stocks that have irregular price jumps from announcement and earnings. This volatility may not last forever, but for the younger generation with little in terms of liquid assets, it is difficult to profit from little to no movement in Fortune 500 names. This is a very risky venture, so when doing this technique, you need to have confidence in the company. If a stock takes a turn for the worst, you have to hold out and wait for a profit, or sell for a loss.

Read More: Warren Buffett Is Stockpiling Cash - Should You?

Now you may ask, "Why are the markets always slow or down during the summer?" Well, one of the biggest reasons is that there isn't much market-swaying information being released. The volatility in the summer is almost pure speculation. Everyone is getting ready for something to trade off of. Usually during the year, the market is overbought and the summer is its correction period before the market picks up again in October. The best time to take a position in the market is between May and October, because it is slow and usually hits its bearish bottom.

This summer, the markets were unusually bullish except for the recent selloff in August. The S&P is so far up 5% for the year and with bearish conditions, could quickly retreat. Other markets such as the German DAX and French CAC are in the red. Corporate profits were announced a couple weeks ago, which were somewhat iffy, but there really hasn't been any groundbreaking information to sway the markets.

So what's next? Well, I think that there will be a re-correction in the bearish market, and we will see some high volatility going into the next couple of months. Unless these companies start releasing negative information, I don't see a reason to start pulling back; just be cautious. Always keep a certain percentage of your portfolio liquid, just in case we enter turbulent markets.

--Written by Max Levin for MainStreet

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