5 Reasons July Is a Great Month for Stocks

If you think traders are off summer vacationing, think again. There's a lot of action in the markets during the summertime, particularly in July, which makes it a great time to rebalance your portfolio — or pull the trigger on the trades you've been scheming about. No doubt, timing the market perfectly is practically impossible. But the historically well-performing month of July is better than many for making positive returns.

Read on for our roundup of reasons why July is a great months for stocks.

1. School's Out

Okay, so we lied. Some traders really are on vacation in the summer. But that's good news for you. Here's why: While they're off teaching their toddlers to swim, surf, and make sand castles, the market's value tends to drift higher from where it should be.

"During… summer, professional investors are collectively less focused on news and as a result, information is incorporated into stock prices more slowly," MIT researcher Lily Fang said. This effect is particularly strong for negative information because taking advantage of negative news by, for instance, short-selling, is more difficult and requires close attention — a scarce resource in July. "Think about how traders spend their summers," Fang said. "They're on the beach with their kids. They're traveling overseas with their friends. They're rightfully enjoying the holidays and as a result not paying as much attention to market news."

Just beware of the "after holiday effect." Stock prices tend to do the worst in September — when summer vacation's over — because investors' kids are back in school and they once again have the time to monitor the markets obsessively, according to Fang's research.

2. Midsummer Rules Dow Jones

The Dow Jones industrial average has posted a positive July return in seven of the last 10 years. The average gain during that time span was almost 2%. That's a pretty spectacular indication that July is the golden time on the Dow to invest.

3. Historic S&P Data Shows Positive Returns

July's market returns have been up 35 of the last 60 years since 1950, according to S&P 500 data. The average return over that period was 0.8%. That's pretty good, but the kicker is that in recent years the month has performed even better. Since 2005, July has had six up years with an average return of 1.6%. A whopping 80% of all trades have been positive in the last decade on the S&P 500 Energy Sector. So if you're planning to invest in July, you'll do well to pick an energy industry stock.

4. Nasdaq Comes Alive, Too

The Nasdaq composite, which averages a 2.1% gain for the month of July, has posted a positive return in six of the last 10 years.

5. Chinese Stocks Bounce Back

For the last five years, the MSCI China index has been one great big slump in the first six months of the year, typically losing about 10% of its value. Ouch. But July has proven to be the bounce back month, marking the start of a season of strong returns that more than make up for those earlier losses. In 2014, the index fell 3% in the first six months, but then gained more than 10% starting in July.

"There is no denying that a pattern has emerged in Chinese equities in the last few years," said Damien Fahy of the consumer website Money to the Masses. "Its roots lie in the Chinese New Year and corresponding government stimulus which tends to rally markets." Although this July has been unusually tough for Chinese stocks to date, the month isn't over yet.

Do you invest in July? Why or why not?

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