With summer winding down many investors are wondering what Q3 has in store for its final month. August was a relatively quiet month especially when we compare to August 2011 when the market had 3% swings numerous times a week. In contrast this summer in general has been a return to the summer slump we have become accustomed to in prior years. As the BBQ covers are replaced and the lake temperature starts to bite we expect liquidity to return to the market and the technical levels that are often unchallenged in summer months to become targeted again.

Summer can be difficult to profit in due to the fact that trends simply do not materialize and without price inefficiency there can be little opportunity to exploit these fluctuations. As I expressed last month there are of course exceptions to this regularity. In 2012, it has been the consistent new highs in the Agriculture market and the aggressive rally in the Energy market. Sideways price movement can however make for slow consistent growth for those who know how to take advantage.

An obvious example of a strategy that can appreciate these slow and steady returns are those who use option spreads. By spreading the market while it is seemingly locked in a range, the CTA can continue to collect small yet consistent profits. The issue with this is that the market values those options quite low due to the perceived risk which is considered low due to the range bound market. The CTA could collect a higher profit by being closer to the market in their spread but they then risk the loss that would incur were the EU to make another announcement or Bernanke announce further easing.

With that being said, most strategies including option spreading have a difficult time generating profits during the slow and typically quiet summer months. Technicians have difficulty finding support and resistance levels that yield profit potential because the low liquidity causes the market to disregard these levels or in contrast the market is too range bound to even acknowledge these levels. Trend Followers struggle to find trending markets because there are few or they are invested in longer term trends that are simply going to be flat for this period of the year. Other strategies see similar resistance for the very same reasons.

The common concern I hear from investors during these hot months is that the return their portfolio has been generating is underwhelming. Although I completely understand this sentiment I must say that this is a much preferable concern then those heard in summer 2011. As someone who is very risk focused, capital preservation is always priority number one. The 45 degree equity curve we all strive to achieve is fantastic but not realistic most years. Positive growth with periods of stagnant returns should be considered the goal for a highly efficient portfolio.

As someone who calls Chicago home, I certainly do not celebrate the end of another wonderful summer but I do look forward to the markets this time of the year. The last four months of the year leading into the holiday season typically offer some exciting opportunities. While each market has its own obstacles and story lines, they each offer potential. As speculators return to their screens we will see liquidity return and we will welcome it openly.

I would be happy to discuss these past, present and future trends in much greater detail with you as well as how I feel you can best position yourself. For questions regarding this article, a specific CTA or Managed Futures in general, please feel free to contact me by phone (312) 913-9603 or email at tresch@iasg.com.