The inside scoop on inside months

Traders and investors aware of August’s history as a somewhat soft month for stocks may have some mitigating circumstances to consider this year.

While July was very much and up-and-down affair for the S&P 500 (SPX), it was also an “inside month” (IM)—that is, the index spent all of July inside the high-low range of June:

That, by definition, represents a volatility contraction from June to July, since the index failed to push above the previous month’s high or low. And because volatility tends to be “mean reverting” over time—that is, periods of higher-than-average volatility are often followed by periods of lower volatility—some traders may wonder how the SPX has performed after past IMs.

Since 1985, the SPX has logged 44 other inside months (IM) and, overall, its performance the month after them suggests the index tended to move a little more than average—and that movement was also to the upside more often than average. While the SPX has a positive return in 319 of the 499 months since January 1985 (63.9%), it has a positive return in 30 of the months following the 44 IMs (68.2% of the time).

That may not seem like an important difference, but performance varied depending on whether the IM closed higher or lower than the previous month. The SPX posted a gain 15 of 26 times (58%) the month after an IM with a higher close, but it posted a gain 15 of 18 times (83%) after an IM with a lower close (as was the case last month).

The following chart compares the SPX’s median returns for (left to right) all months since 1985, the month after IMs, the months after IMs with higher closes, and the months after IMs with lower closes:

In other words, over the past four decades or so, not only has the SPX closed higher the month after IMs more often than average, its typical monthly gain was also larger than average.

Monday’s rally doesn’t mean that pattern is going to play out this month, but traders anticipating a certain level of seasonal weakness may want to consider the implications of this historical tendency, as well.

Today’s numbers include: International Trade in Goods and Services (8:30 a.m.), Factory Orders (10 a.m.), JOLTS (10 a.m.), vehicle sales.

Today’s earnings include: Advanced Micro Devices (AMD), Arista Networks (ANET), Bed Bath & Beyond (BBBY), Booking Holdings (BKNG), Caterpillar (CAT), Exact Sciences (EXAS), Kimberly Clark (KMB), Lattice Semiconductor (LSCC), Mattel (MAT), McDonald's (MCD), Merck (MRK), Pfizer (PFE), Rockwell Automation (ROK), Spotify (SPOT), Sunoco (SUN), Turning Point Brands (TPB), Wynn Resorts (WYNN).

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