Forex Trading Library

The End of the Summer Rally?

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Back in late June, we talked about spotting a bear market rally, and how the market tends to rise through summer. Since then, most stock markets around the world have risen, and the Nasdaq even managed to technically get back into a bull market after gaining 20%. Now, the question is whether the gains will keep going (and potentially the dollar could weaken), or is it all about to end?

During the summer, trading volume is typically lower as a lot of the big market makers go on vacation. August is the time when most central banks take a break, as well. This lower volume gives space for smaller traders who tend to be more optimistic, to help push the market higher. More sunshine, improving production, and a host of other factors come into play that usually means markets close higher during the summer.

Now what?

In the United States, Labor Day is the informal transition from summer to autumn for the markets. It’s not exact, but by then the big traders are back from their holidays, earnings season is over, and focus switches to how things will play out for the rest of the year. Through the course of the third quarter, major corporations adjust their guidance, and given the economic conditions, that probably means cuts. Generally, optimism takes a step back.

Timing market moves is always difficult. If there was a sure-fire way of knowing when the market would turn around, then there would be no need for traders. So, anything approximating a date for the market to turn around must be approached with extreme caution.

Trying to make an educated guess

All general moves in the market lead to some kind of correction along the way. After nearly two months of the market trending higher, it would be a surprise that at least a correction would be on the way. Which means it’s quite useful to keep track of the dynamics that have supported the current move, and then see if they are shifting as a potential precursor to a change in direction.

The end of a summer rally typically coincides with a shift in risk sentiment, which means currency markets are likely to be affected as well. In fact, currency markets might even be a precursor to the shift, as traders move away from higher risk assets and bond yields rise. Most recently in the US, bond yields were trending higher but the FOMC minutes took the wind out of their sails. That might mean there is a bit of a reprieve when risk sentiment turns around, and it could be a little later than normal for when the markets turn around. On the other hand, the downbeat tone from the Fed might accelerate the turn around.

Lining up opportunities

The main issue for when markets do turn around is trying to figure out if it’s a resumption of the downward trend, or a correction. As we mentioned back in June, it’s impossible to know for sure until it’s already happened.

But a long-term rally in the midst of poor economic data and the Fed promising to keep tightening isn’t normal. In fact, that hasn’t happened before. Optimism might push the market higher for short periods of time, but it can’t fight fundamentals forever. As volumes start ramping up in early September, a keen eye on the data might help figure out whether a shift in market sentiment is temporary, or the start of another leg lower.

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