The stock market’s historically worst 2 months are dead ahead. Time to worry?

‘The path of least resistance is still higher for stocks’

August and September have had dismal records for stock returns over the past 20 years and with strategists warning that the market is overdue for a major correction, the next two months could be rough. But there are reasons to believe that any impending selloff may not be as cataclysmic as some fear.
Bank of America Merrill Lynch’s technical research analyst Stephen Suttmeier pointed out that there are some very important factors that suggest that the market’s upward trajectory remains very much intact despite the track record working against it.

“First half 2017 was above average and this bodes well for second half 2017 and the data for all periods, secular bull market years, and Presidential Cycle Year 1 suggest that the S&P 500 could end the year in the 2,550-2,640 range,” said Suttmeier in a report.

In fact, during the early part of the presidential cycle, if stocks perform better than average in the first six months, the index rises 75% of the time in the second half with an average return of 5.38%, he said.

The S&P 500 rose 8.2% from January to June and finished July 1.9% higher.

Subdued volatility in the market is another reason to be optimistic. Suttmeier notes that the CBOE Volatility Index VIX, +2.59% Wall Street’s so-called fear index, is trading at record lows.

“The CBOE Volatility Index remains low and near 10 after hitting a record intra-day low of 8.84 on July 26. Data back to 1990 suggest that VIX is typically closer [to] 20 plus when the S&P 500 starts a correction of 5%, 10%, or 20%,” the analyst said.

Things are looking fairly solid from a technical perspective as well. The NYSE advance/decline line — which tracks the number of advancing stocks minus the declining shares each day and adds that to the figure from the previous session — is at fresh highs, pointing to a limited downside even if the market turns south.

But the best case for the S&P 500’s uptrend may be the following chart in which Suttmeier illustrates how the current bull market is tracing a similar path as the rallies of 1980 and 1950.

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