Mid-Month Market Update: August Delivers Typical Weakness But Mid-Month Strong
By: Jeffrey A. Hirsch & Christopher Mistal
August 13, 2015
Par for the course, August’s first nine trading days were quite weak. As of the close today, the ninth trading day of August, S&P 500 was down about 1.0% for the first nine days of August. Both DJIA and NASDAQ were down over 1% for the period while the Russell 2000 suffered most off about 2.7%.
[First 9 Days Table]
Next week is options expiration week and mid-August is often better performing than the beginning and the end of the month. This strength is punctuated with a three-out-of-four-day cluster of bullish days that wrap the weekend from August 14 to 19. A bullish day is defined as a trading day in which the S&P 500 has risen greater than or equal to 60% of the time over the past 21 years. 
August 2014 option expiration week was up nicely across the board with a 2.15% gain on NASDAQ for the week. Unfortunately, this bullish cluster has not always resulted in full-week gains during option expiration. DJIA and S&P 500 have suffered a weekly loss in three of the last five August expiration weeks.
For the past 33 years since Triple Witching began in 1982 with the introduction of S&P 500 Index Futures trading on April 21, 1982, the Monday of August expiration week has been consistently positive. Expiration day and the week as a whole are not so bullish, while the week after has exhibited more upside. DJIA shows less strength than S&P and NASDAQ. 
[Options Table]
Don’t Fear the Death Cross
Bulls are in retreat and the ranks of bears and those expecting a correction have swelled. Investors Intelligence advisor sentiment readings have shown the bulls in retreat for several weeks now down to 40.2% from 49% three weeks ago, 51.6% in late June and 57.4% at the end of April. Bears are at a high for the year at 18.6% and the correction reading is now at 41.2% (present company included). The correction camp now exceeds the bulls for the first time since last October when the summer/fall correction ended last year.
On Tuesday DJIA’s 50-day moving average fell below its 200-day moving average registering what is ominously known as the death cross. Unfounded rumor has it that this death cross is a negative indication for the stock market. Our research shows this is not always the case. DJIA’s last death cross on August 24, 2011 came 40 calendar days before the subsequent correction low was made on October 3, 2011, a modest 5.9% lower low.  A July 7, 2010 death cross was even milder with a low arriving 50 calendar days later at a mere 0.3% below the day of the cross. Most of these death crosses occur near intermediate or short-term lows. The flipside of the death cross, the golden cross, when the 50 DMA crosses above the 200 DMA is more indicative on the upside.
In the next chart the 30 trading days before and 60 trading days after all 43 DJIA death crosses since 1950 have been plotted. On average, there was nearly no difference in the severity of the decline whether it was during the “Best Six Months” or the “Worst Six Months.” The 43 previous death crosses were split nearly down the middle between the two periods, 22 were in the “Worst Six Months” and 21 in the “Best Six Months.” What is clear in the chart is that by the time the death cross occurred; the bulk of DJIA’s move lower had already taken place.
So with bulls on the run, moving averages death crossing and relatively bullish mid-August and expiration beginning tomorrow look for a short-term snap back rally before a resumption of downward pressure at the end of August and into September. In addition to seasonal pressure, economics and market action both here and abroad are not encouraging and then there is the increased likelihood of a Fed rate hike sooner rather than later – which is not historically bullish for the market in the near term.