Stocks markets are currently displaying a low risk state, typical of August, with Q2 earnings coming to an end, and August holidays in full swing. At present volatility has been crushed.
This time of year potential upside catalysts are less frequent, while downside ones increase. The potential for downside catalysts increase because any momentum from earnings fades, volumes are reduced, and desks are lightly staffed. Often an event, whether economic or geopolitical, can easily push markets around producing an out-sized and dramatic move. Last year for example, China made a large devaluation of the Yuan in August causing the S&P to fall 11%. Such events are unknowable and hard to plan out. The best course is to remain in the strongest parts of the markets and raise hedging allocation when inexpensive, providing the best risk to reward.
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While staples tend to do well from late spring to fall based on 20 year historical studies this 5 year analysis shows its paid to own the sector most of the year with August and January being the only down months.