With the summer starting to come to a close I've decided to put some of my recent research and testing aside for a while and thought I would share some more frequent recaps. I've actually been thinking about trying to get some of these up for at least a few weeks if only because this August has been so far outside the norm.
There's no way to exactly predict how each month or season will play out in the markets but there are some common threads. Yes, the Santa Clause Rally is a thing and we usually see stocks head up into the holidays but not always, as evidenced by last year's big drop. Then we tend to start a bit slow in January and pick up steam over the spring. From there when we hit July and August the volume and volatility usually tapers off as there's less big news, fewer earnings reports and less traders at their desks. I guess they're all off in the Hamptons.
So far this summer, particularly this August, has been a big exception. News of trade talks with China stalling certainly didn't help matters but as usual with the current regime there has been a number of "factors of uncertainty" in play and it doesn't seem like it's stopping any time soon. With the Fed under regular assault, Middle East tensions and ongoing trade wars we can probably expect things to remain more volatile than usual in the near future.
Volatility is a good thing for traders in most cases as it usually creates lots of opportunity and excellent reward to risk scenarios but it's a bit of a double-edged sword. If things become too volatile then it can become harder to control risk effectively and the chances of being effectively "whipsawed" by the market jumping back and forth without really choosing a sustained direction increase. Because of this it's usually best to play things at least somewhat cautiously while volatility remains on an extreme.
The good thing about these conditions though is that it usually leads to fantastic trading opportunity in the relatively near future. When volume and volatility comes off the extremes it rarely drops to average or low volume and volatility right away. Things slow gradually and during that period where volatility is no longer extreme yet still above average the number of high quality trades is usually exceptionally high.
I'm happy to play it a bit safe and be very careful of the structure of the market right now but I'm more comfortable doing that because I know my patience will likely pay off. They might come tomorrow, next week or even a bit farther out than that but as long as I don't chase a wild market and simply pick my spots for now I know there will be even better conditions and trades to come.