August 2010 turned out to be a dud for stocks, vindicating the cautious/bearish stance I had advised you to take early in the month. For the period as a whole, the Standard & Poor’s 500 index shed -4.7%, its worst August since 2001.

Fortunately, a bad August says nothing negative about the rest of the year. Since 1995, in fact, the S&P has suffered six down Augusts — and the rest of the year, in each case, has clocked a gain.

So it’s premature to throw in the towel on 2010. I’m still looking for a strong Q4 rally that will pull the major market indexes decisively into the black. But the looming political realignment in Washington will likely back-load the gains into November and December (after Election Day, November 2).

Meanwhile, we’ve got September, with its nasty reputation, to deal with. Since 1928, September has posted by far the worst results of any month, with the S&P losing an average of 1.2%.

How does this insight affect your strategy? Well, it certainly argues for an extra degree of caution in buying, at least until technical gauges signal that an important bottom is at hand.

We’re getting closer, but we’re not there yet. Use sudden rallies, like last Friday’s one-day wonder and yesterday’s big surge, to close out stocks and mutual funds you don’t care to hold for the long term. If you’re underweighted in stocks, versus our 60% recommended allocation for your overall portfolio, take advantage of steep daily drops (1% or more in the Dow or S&P), to nibble at the four-star picks listed in our September issue.

Move slowly and deliberately, with a goal of reaching your desired long-term weighting in stocks by late September or early October. If I see reason to accelerate your purchases, I’ll let you know, right here in this space.

Best buy as we speak: PowerShares India Portfolio (NYSE: PIN). Earlier this week, India reported that its “real” (inflation-adjusted) GDP grew a sizzling 8.8% in the June quarter from the year-ago period.

Unlike China, whose government-manipulated economy is coming under increasing suspicion both inside and outside the Middle Kingdom, India is experiencing genuine, balanced growth. Exports, for example, account for just 20% of Indian GDP, versus close to 40% for China, with its bloated industrial sector and starved consumer sector.

India’s stock market is also trouncing China’s in 2010. Year to date, the Bombay index is up 2.9%, compared with a -19.5% loss for the Shanghai index. Tune out the China hype and buy PIN, a model portfolio selection, at $23 or less.

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