THE DAY AHEAD: Don't overreact to August's flaws

Traders return to the pits Monday and if they don't seem terribly ecstatic it's understandable. If recent history is any guide, the month of August figures to be a rough one.

Last year, leading technology and financial stocks tanked. There's no delicate way to put it.

Veteran traders will tell you that if it weren't for the infamy of a few bad Octobers, the entire exchange would simply cram August's 31 days into the other 11 months and move right into September.

Have an opinion on this?

It's not that August itself is evil.

Although, it is as long as a month can get. And it doesn't have any holidays unless you count some obscure European banking ones. It's hot, lethargic and generally forgettable. It's famous for being a "preparation" month for the "real" months ahead.

Because August is what it is, traders and investors tend to be on vacation. The trading volume is unusually light, making for huge swings in the major indices. One big move in either direction tends to generate artificial momentum.

Here are a couple of guesses why:

There's simply a general dearth of news in August. It's hunkered right between most companies' second-quarter and third-quarter earnings reports. It's hard to sustain any substantial rally without a steady dose of reassuring financial news. It's much easier to play it safe and sell.

People buy a lot of new homes at this time of year and need cash for those down payments. These days that means selling some of those stocks since nobody seems to actually save money anymore.

Maybe some of the second-stringers overreact to every little whisper while their bosses unwind on the coast.

Ask any young broker and they'll tell you it's because you can't get anyone to answer their phone much less return a call.

Let's make some news

Every major newspaper and most of the financial Web sites will have some type of story about how the market's really sweating out the employment and wage statistics due out Friday. They'll even try to make it sound like a secret.

The theory goes that if these numbers show the economy grew too fast because too many people were working and earning more money than ever before, this is bad for the stock market.

And it's bad, the theory goes, because the central bank might raise interest rates.

The last thing the Fed needs is an "overheated" market even though its leader begrudgingly admits the mind-boggling dynamics of today's market and industries-especially technology-make it near impossible to assess what normal means anymore.

Sure, the Fed's going to consider this news and make some type of comment on or adjustment to interest rates later this month. But everyone already knows this.

My question is: When is the market not concerned about interest rates?

When there's almost nothing going on, you've got to make something out of nothing. That means paying a disproportionate amount of time and energy dwelling on information that would normally pass without much comment.

Economists can't have it both ways

"You've got a very nervous market here. Any economic data that shows a stronger-than-expected economy is not going to be taken well by Wall Street," said Roy Blumberg, a money manager at Sheer Asset Management.

Yeah, but a month ago that same nervous market got a shot in the arm after the Fed only raised interest rates one quarter of a point and adopted what they call a "neutral" bias. Neutral meaning that it's not any more or any less inclined to adjust interest rates in either direction.

Three weeks later, the market tumbled on some economic reports that some suggest might influence what the Fed does at the end of this month.

Does anyone else see the pattern?

If any fund manager on the planet hasn't already adjusted for at least a quarter-point bump in interest rates sometime this year, they should be fired at once. No questions asked.

Investors and their charges want to play it safe, especially after what happened last year at this time. Take a look at your mutual fund or 401(k) chart for last year if you need any reminder.

Don't despair August sympathizers. No matter how bad it gets in August, there's always a chance it might get even worse in October as it did last year. Worse, of course, being a relative term since the Dow is trading well above the 10,000-point threshold.

If the economy is so good that bad things might happen, then what happens when the economy goes bad? Does that mean it's good for the stock market?

The market tends to sell off in August for thousands of reasons. But the Fed will take all the heat. Who else is there to blame?

Everyone else is gone.