The S&P 500 rebounded sharply higher in July with a month-to-gain of about 7% thus far. Seasonals were favorable in July with an average monthly gain of 0.90% over the 6-decade period of 1950-2009, which means July is the sixth best month of the year. However, we are now moving into the neutral month of August and then into September, which is the worst month of the year. The S&P 500 index in August has shown a small average monthly gain of 0.13% over the last six decades, which makes August the fourth worst month of the year. The S&P 500 index in September has shown an average monthly decline of -0.62%, which makes September easily the worst month of the year.

We are also moving into a time of the year where the market seems prone to big sell-offs. In the past six decades there have been eight times when the S&P 500 has shown a monthly decline of more than 10%. Six of those eight declines occurred in the upcoming period of August through November. August (1998) and November (1973) each saw one decline of more than 10%. There were two declines of more than 10% in September (1974 and 2002) and October (1987 and 2008).

The S&P 500 in July staged a solid rally but has yet to show enough strength to suggest that the downward technical correction that began in April is over. The stock market may need to decline and correct more of the post-crisis rally (March 2009 to April 2010), which has seen a correction thus far of only 37.7%. With the market in a potentially vulnerable technical condition, the upcoming weak seasonal factors take on a more ominous tone.

There are also weak fundamentals that could converge with the weak seasonal situation. While strong earnings are currently a major bullish factor for stocks, negative fundamentals could develop from continued weak U.S. economic data, any fresh signs of a slowdown in China, or tax selling on uncertainty about whether the Bush tax cuts will be extended to prevent a big increase in tax rates on January 1.

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