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For Stocks, August Likely To Be Anything But Calm

A typical August involves low volume and lackluster moves for the stock market, but with the amount of variables on Wall Street now, high volatility should make this month anything but typical.

AP

Investors and traders hungry for anything to hang their hopes on are expected to be watching market developments closely in August for anything on which to capitalize. Financials, the most critical sector in the market right now, are circling around a bottom while their depressed cousin, the housing industry, also looks for a capitulation point.

And with both parties slated to hold presidential nominating conventions later in the month, the next 30 days are likely to blaze a trail into autumn.

"Anticipation," was the word Dave Rovelli, head of US equity trading at Boston-based Canaccord Adams, used to describe the market mood. "There's definitely a mindset change. People are anticipating getting out of this doldrum and there's a lot of money on the sidelines. People have gotten killed and they can't afford to miss the move."

The Volatility Index has held at relatively benign levels in the low 20s for much of the summer. But in 2007 the VIX crossed the 30 threshold as the credit crisis moved into full swing, after being in the low teens the previous year.

A likely upswing in the Vix, analysts say, promises an unpredictable time ahead.

Inside the August Numbers

In a normal market, talking about a big move either way for August would be wishful thinking.

Historically the month is the second-worst of the year, behind only September. The Dow typically loses 0.1 percent during the month, while the S&P 500 gains 0.1 percent and the Nasdaq finishes up 0.3 percent, according to the Stock Trader's Almanac.

The numbers, though, are often better during presidential election years, when the Dow gains 1.4 percent, the S&P improves 1.8 percent and the Nasdaq shoots up a sizzling 2.8 percent. On the flip side, market players would be best served to stay in bed on the first trading day of the month, which has seen stocks drop in eight of the past 10 years.

"I agree that August is usually slow, but I don't think it's going to be slow this year," Rovelli says. "People have lost too much money. They can't miss too many opportunities. I think it's going to be active."

What Makes This Year Different

Of course "active" and "up" are too different concepts. Rovelli and others say the market could well bounce along the bottom overall, with substantial spikes in between.

Market analysts and adviser see a number of dynamics pushing the market as the summer closes, some of them not so positive.

The political conventions, for instance, could produce a wave of negativity as Democrats stress the faltering economy and Republicans try to put a happy face on both inflationary pressures and the war in Iraq. (See Mad Money host Jim Cramer's legendary credit crisis meltdown in video at left.)

"The political rhetoric that we'll hear out of the convention from the Democratic side will harp a lot about what's gone wrong, from higher oil to the weak US economy. So that's not going to help us," says John Massey, senior vice president and portfolio manager at AIG Sun America Asset Management. "From the Republican side, they'll try to talk about the successes in Iraq and Afghanistan from a defense standpoint. I'm not sure that's positive. They'll try to stay clear of the weak economy."

At the same time, there are geopolitical tensions in Iraq, Nigeria and elsewhere, and signs that the economy is slowing in China, which is hosting the summer Olympics.

"There's so much going on," says Nadav Baum, managing director of investments at BPU Investment Management in Pittsburgh. "You've got geopolitical action going on, you've got oil issues going on, you've got election things going on. With all that activity, you're going to get major swings."

How to Survive

The expected volatility could be just the thing investors can take advantage of to make money in such an unusual environment.

"Certainly the fact that volumes tend to be lower in August means volatility will be key," says John Massey, senior vice president and portfolio manager at AIG Sun America Asset Management. "We invest for the long term, so volatility gives us the opportunity to reduce risk and buy assets a little bit more cheaply."

Massey is overweight in health care, consumer staples and technology and underweight in consumer discretionary and financials, as he's not sold that the worst has passed for banks.

And there are those who are stressing old reliable diversity as a way to weather the end-of-summer storm.

"What's happening to people is they're really starting to look at how all this stuff in the external world is affecting their internal world," says Julie Murphy Casserly, president of JMC Wealth Management in Chicago. "This is the time for people to buy when so many people are running. I still say that you should buy in a diversified portfolio, the intention of more so looking at large-cap focus."

Indeed, there is anticipation that if the market can get some good news--a continued accounting in the financial industry and a drop in energy prices paramount--the market can use its August activity to establish a positive focus heading into the remainder of the year.

"My feeling is as long as we continue to get some decent moves on earnings the market might surprise people. When everyone thinks it's going to go one way it usually goes the opposite," says Baum, who sees the market in a trading range but with big spikes in between. "You're going to see us continue to bounce in these wild ranges."