Why investors expect 'August Angst' to come

Matt Krantz
Trader on the floor of the New York Stock Exchange.
Getty Images

Investors have been flip-flopping between optimism and pessimism for months. But one indicator is warning investors to brace for trouble ahead.

One way to measure the mood of investors is by comparing the S&P 500 High Beta Index versus the Low Volatility Index. When the High Beta Index races ahead, that means investors are looking for thrills and willing to throw caution to the wind in the pursuit of big gains, says Sam Stovall of S&P Capital IQ. But when the Low Volatility Index assumes leadership, that's a signal investors are hunkering down.

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Using this measure, Stovall says investors have taken a decidedly defensive stance since July 31, showing that risk is out of fashion in the market since the market set a new high in May. This "risk-off mindset" signals a tough time ahead for investors in August, he says. "In the month ahead, investors may therefore be more inclined to focus on their tans than on their portfolios," he says.

The outperformance of low volatility stocks shows that investors are expecting August to again live up to its reputation as being a lousy one for stocks. The month of August ranks as the tenth worst for investors since 1945, Stovall says, just behind February and the infamously bad September. But August doesn't just hand losses to investors - but nerve-rattling moves. The month of August has put investors though the second highest level of volatility since 1950 based on the number of days the market swings by 1% or more. Only October is worse.

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