Based on an analysis of data from 1979 - 2005, the next four-to-six weeks has been a seasonally weak period for the Nasdaq Composite index and the Russell 2000 index relative to the S&P 500 index.While it's hard to say for sure why those two measures have tended to underperform the broad market around this time of year, several possible explanations come to mind:
- Pressure from mutual funds cutting losing positions in volatile or thinly-traded issues before the books are closed at the end of October
- Asset allocation shifts in favor of larger, more defensive shares amid uncertainty over back-to-school sales and the upcoming holiday selling season
- Attempts by traders and portfolio managers to cut risk exposure and dampen portfolio volatility as the time approaches for end-of-year bonuses to be decided
Nevertheless, the possibility that small cap and Nasdaq shares could lag other issues in the weeks ahead is something worth keeping in mind.
Michael Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle.
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