"Game of Thrones" had "winter is coming." The market should have "August is coming." You knew August could get rough if you listened to what I said on July 21, when I told you that August would bring lower prices and choppy markets:

Don't get alarmed, but know this: We are in a strong market, trading at highs with nearly all buy signals. That's usually unsustainable, which means I think we are setting up for a little give-back. I don't do predictions, but gun to my head, we could see -5.5% by mid-August, or 2,850 on the S&P 500. The data will give clues if something like this is going to happen. But then I believe it will just continue to march right on higher.

On Friday, Aug. 2., the S&P 500 closed at 2,932.05, down 2.84% from highs.

I also said that it was a good time to trim risk and take some profits but not to touch core positions. Why not? Because the market was overheated, and I wanted cash ready for when the market would inevitably pull back – then the market would just resume its march higher. 

Then, 10 days later, I filmed an update video for a publication of ours. It said: buckle up, August is here – we should close the market and go away for the month. You can't ordinarily set your clocks to the market, but Aug. 1, you could've! Volatility started on cue.

Last week, we saw buying early, followed by heavy late-week selling. Energy, especially oil and gas, saw huge selling: nearly 90% of the universe of energy stocks. Materials, industrials, and telecom also saw sell signals. Growth sectors like tech and consumers saw selling, but not at prices low enough to warrant signals – at least not yet.

Chart showing unusual institutional buy and sell signals by sector

Bumpy August is here, and people are selling stocks. What does it mean for the market, and what do we do about it?

I'll boil it down for you: don't get shaken out. It would a Blockbuster-like mistake to let August, (a normally volatile month for the markets) sway you from owning stocks. This article highlights that colossal mistake. Back in 2000, Netflix, Inc. (NFLX) CEO Reed Hastings approached Blockbuster CEO John Antioco and offered to sell Netflix for $50 million. 

Antioco thought Netflix was cute, but niche. He declined and did business with an Enron broadband-provider instead. Ouch! Today Netflix is worth $139 billion, +2,780% more than Hastings' offer. Blockbuster peaked at $5 billion before eventually filing Chapter 11, when it was worth $24 million.

Imagine if that deal happened. Well, don't let a choppy summer cause you to say, "What if I didn’t sell out of my stocks?" years from now.

That’s how I began my weekly call with multi-billion-dollar money manager Louis Navellier. Gary Alexander was there too, a gold expert and senior editor for newsletters for 20 years.

We addressed many topics, but all ultimately related to how the market still sets up very nicely for the medium term. In the near term, we all agreed: we should close the market and return after August. Here's what we talked about:

  • The market was back near highs when Trump dropped a tweet-bomb: tariffs on $300 billion of Chinese goods would start Sept. 1. Curious timing how he always reignites the trade war when markets near highs. I think he wants leverage and bargaining power at trade talks. It's a strong-arm tactic that Trump relies on often. We still need each other as trade partners, and China's weakening economy and precarious political situation in Hong Kong weakens its position a touch.
  • The well-timed tweet was a great excuse for Europeans to flee equity risk and hide out in bonds. Then they can vacation worry free! The entire German bond yield curve went negative for the first time ever last week. That's right: no matter what maturity bond you buy in Germany, you must pay to service the investment. That's how much people want safety over there.
  • The supply of minted gold coins dried up dramatically. Why? European coin dealers close their doors to go on vacation for – you guessed it – August. Incidentally, gold popped to a six-month high as you can see here in the Perth Mint Physical Gold ETF (AAAU):
Chart showing the share price performance of the Perth Mint Physical Gold ETF (AAAU)
Yahoo Finance
  • Stock buybacks continue at a huge pace. S&P 500 companies are on pace for another $940 billion of stock buybacks in 2019, according to Goldman Sachs. That should blow by the record buybacks last year – courtesy of Trump's tax cut. And companies are shrewd in how they use it. For instance, Align Technology, Inc. (ALGN) reported strong earnings but guided lower. The stock then plunged around 30%. A week later, Align reported completing an "accelerated buyback" of its own stock. The CEO even bought $1 million of Align shares. 
  • The dividend yield of the S&P 500 is way better than U.S. bonds. The 10-year slipped to 1.855% on Friday. You get 38% more money in your pocket after taxes owning stocks rather than bonds.
Table showing the yield advantage of owning stocks over bonds

What was the consensus on the call? Navellier summed it up perfectly: "Any time yields are this low: buy buy buy!"

Don't have a Blockbuster moment. Active traders may maneuver around summer air-pockets, but the long-game is staying long. Hold the best stocks out there and ride through the chop. The underlying picture is bullish for stocks. Don't get shaken out of positions. 

You may say, "What if no trade deal?" or "I heard the market is poised for a crash?" and a bunch of bearish what-ifs. It takes courage to stand pat in uncertainty. But as Winston Churchill said: "Courage is what it takes to stand up and speak; courage is also what it takes to sit down and listen."

The Bottom Line

We (Mapsignals) continue to be bullish on U.S. equities in the long term, and we see any pullback as a buying opportunity. Overheated markets can offer sales on stocks if an investor is patient. 

Disclosure: The author holds a long position in Netflix at the time of publication.

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