When a Bloody August Is the Ideal Setup

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By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

A red August sets up a perfect trade under these conditions…
What comes next is spectacular…
Until then, mind the gap…
Jason Bodner’s expert timing nabbed six double-digit wins…
Market-leading stocks to buy in an August rout…
Stranger than fiction: Nuclear reactors on the moon?!

I want stocks to fall this month…

Not because I want to stroke my ego. Okay, not just because of that.

And not just because I want to put my profits to work at better levels.

But because the lower prices go in August, the more confident I am in a huge recovery in Q4.

Let’s back up…

Dedicated readers know I’ve been warning about an August downturn in these pages for weeks. I even highlighted the last couple weeks of July as a prime profit-taking opportunity.

Seasonality got us to start looking more closely. The high-risk sentiment added to our conviction. And the charts confirmed it.

As if on cue, markets have turned risk-off. The S&P 500 is about 2% off its highs. August is down for the month so far.

Because the data shows that a red August, while painful for the next few weeks, is actually a chance to buy ahead of a monster signal setting up into year end.

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Let me show you what I found…

Set aside all the seasonal forces at play for a moment.

Instead, let’s focus on the fact that the S&P 500 was up for three straight months…

That’s the longest streak of positive closing months since September 2024, when it ended a five-month win streak:

Since then, stocks have been on-again, off-again… or worse, on losing streaks.

Looking at longer term, we tend to assume the market goes up nearly every month. But three-month win streaks in the S&P 500 are pretty rare.

It’s happened just 39 times since 1990. 35 years is 420 months. So, in a rough, napkin-math sort of way, the market has spent less than a third of the time (117 months) on hot streaks like this.

Cool. So, what happens next?

Incredible things happen next…

One month after a three-month win streak, the S&P 500 has been up 74.4% of the time.

And when it has, it’s been up an average of 5.4%.

So, the tendency is for stocks to continue these streaks in the short term… and to follow through with really strong short-term momentum. Three-quarters of the time, anyway.

The seasonal pressures of August and September may interfere with this.

But let’s keep going…

Three months after those win streaks, stocks were up 81.6% of the time. And when they did, they ripped 6.4% on average.

There we have much higher probability… and higher returns.

Six months? Up 83.3% of the time an average winning trade of 10.8%.

That right there is the ticket.

Three-month win streaks tend to set up major follow-through over the longer term… with returns that are close to double the long-run annual averages.

Taken from July’s closing level, a six-month 10.8% rise in the S&P 500 would put the index over 7,000:

That’s why the August seasonal weakness is such an important opportunity.

All that cash you hopefully took off the table can get back to work after the summer break.

Until then, though, you want to keep an eye out for signs of a local bottom in stock prices.

Let’s zoom in and try to find one…

Moving to a daily chart of the S&P 500, we can see that the 6,200 level has acted as support throughout July and in the recent wipeout to begin August. That’s a logical area of first support where it makes sense to add some exposure.

Below that, we can see that the pre-Liberation Day lows of February and March… also corresponding with the lows of June… are an area of huge buying interest.

And on the right side of that chart, the Volume Profile bars show how much trading volume occurred around those levels, with the largest amount of volume at around 6,200. If August turns bloodier and stocks revisit those levels, that level could prove a strong buy.

Turns out, I wasn’t the only one taking profits during July…

So were subscribers of our growth and small-cap investing expert Jason Bodner …

Take a look at some of the long-term gains Jason recommended taking to his Quantum Edge Pro readers right ahead of the early August rout:

Cadence Design Systems (CDNS): 63.8% since March 2023
Copart (CPRT): 41.8% since March 2023
Alamos Gold (AGI): 38.5% in 10 months

Here’s what Jason had to say to his subscribers…

Since the April 8 lows, our Quantum Edge Pro stocks have surged 32% on average. That kind of gain in that short a time is exceptionally rare.

While I didn’t necessarily expect stocks to recover that quickly, the data told us they would recover. And because we invest in the highest-quality stocks to begin with, we were much better served holding them.

At the same time, we knew we would eventually want to fine tune the portfolio by taking some profits and rotating out of some losses to stay in the best-positioned stocks, free up some cash, and be ready to pounce on new buys in summer weakness.

That time has come. The trend is still up, but momentum has slowed. And I expect typical summer choppiness – possibly intensified by tariffs and other headlines – to start in the coming weeks.

CPRT and AGI are both lower today than when Jason recommended selling, offering some sage foresight into the August selloff.

As for which stocks to buy the dip on now…

TradeSmith makes it so easy to find great, market-beating stocks.

And Jason’s Quantum Score is actually one of my favorite ways that you’ll frequently hear me reference here.

This system quickly culls the market for anything that’s not growing like a weed… and getting snapped up by major Wall Street institutions.

It does this by ranking stocks based on a composite of a Fundamental Score and a Technical Score.

The Fundamental Score covers sales, revenue, and earnings growth…

While the Technical Score covers momentum and unusually high buying volume – the kind that tend to come from institutional investors… or what Jason calls Big Money.

We conducted a backtest of Jason’s system going back to 1990. And it showed that holding the top 20 stocks of this system – then rebalancing every six months – would’ve led to you outperforming the S&P 500 by more than 5 to 1 over those 35 years.

The returns we’re talking about would turn every $1,000 invested then into $82,000 today.

Using the TradeSmith Screener, we can simply look for stocks with a Quantum Score above 70 across the market cap spectrum…

That cuts thousands of names down to just 208.

Here are the top five, ranked by Quantum Score…

Palantir (PLTR) and Meta Platforms (META) need no introduction. But energy technology company Vistra (VST) and Parkinson’s-focused biotech Acadia Pharmaceuticals (ACAD) are more under-the-radar names you may not know of. Cloud security company F5 (FFIV) also falls under this niche.

These are the highest rated stocks in Jason’s system right now. And as we showed, names of this caliber tend to outperform the market big-time. They’re worth a serious look as August continues on.

(TradeSmith Platinum subscribers, or any others with access to both our Screener software and Jason’s work, can click this link to look at this screen themselves.)

The nuclear trend is going to the moon…

And not just in the hyped-up-price sense we saw a lot of back in 2021.

It’s also quite literal.

U.S. transportation secretary and temporary NASA administrator Sean Duffy ordered a fast-track of an honest-to-God nuclear reactor on the moon, producing at least 100 kilowatts of power by 2030.

The purpose? It’s a long-run bet on the future of space travel.

Nuclear energy is already getting a lot of attention from the current administration as a way to scale AI power needs. That’s a theme we’ve been covering going back to 2023 here at TradeSmith Daily.

This latest effort opens the door not only to a crewed lunar base, powered by nuclear fission… But potentially nuclear-powered spacefaring vessels as well.

A nuclear reactor on the moon might sounds like “stranger than fiction” territory. But these plans were already in the works. The White House just wants them done even faster so we can compete with China in a 21^st century space race.

What does it mean for you as an investor?

Well, like Big Tech snapping up long-term contracts with nuclear energy producers for AI… this is a signal that the nuclear energy trend is just ramping up.

It’s yet another reminder to keep some exposure to the nuclear trend. The easiest way to do that is with the Global X Uranium ETF (URA), which holds a basket of nuclear firms.

When a Bloody August Is the Ideal Setup