The typical summer scenario of a couple small rallies accompanied by a couple of pullbacks has not taken shape, so far. Those taking comfort in that fact should wait just a little longer. Last summer, much like this one, we had our first tease of a pullback in late May and early June and that pattern repeated itself this year. The larger pullback came in August with a retest of that low made in September before a rally ensued. Markets don’t always repeat themselves but human nature is a powerful force and it is in our nature to look for patterns and repeat them.
If we are to have a summer swoon it will likely be in August. The dog days of August usually means less trading volume, more volatility and there tends to be an event that will be pointed to that caused the pullback. The likely culprits will be either Europe or our fiscal cliff that is fast approaching.
Then again there may not be much more weakness. In 2003 and 2009 there was no summer pullback but for that to happen we will need a catalyst of some kind and that too can come from Europe, if they announce actual steps taken to implement a tighter financial union or even from China with positive results from their stimulus efforts over the last few months. It could be QE3 as well. Whatever it is it is going to have to be significant in nature to break the summer pattern.
It will be an interesting month of August and for those on vacation you are going to miss the excitement.