August and September are historically the two worst months of the year.
Obviously, there is no guarantee of poor performance but investors should be prepared. Weakness in August tends to accelerate into September and produce tradable bottoms in October.
October is known as the bear killer month since many bear markets tend to make new lows in October and those lows are bought to start the normal Q4 rally. Sometimes market lows are made in September and October starts out choppy rather than suffering a big downdraft.
The current market fundamentals are very bullish. The economy is strong and earnings are well over 20% and showing no signs of abating.
The only hindrance to the market is the trade war and the potential for economic impact if it worsens. In recent days it appears investors are moving out of their pessimistic outlooks and into the hopeful expectations camp. That does not mean the market is going to follow suit.
However, the trade war has been with us for months. The maximum damage came in March. Since then there has been a slowly building uptrend. With the S&P only 32 points from a new high, it does not appear the tariff overhang is much of a problem. The weakness in March and April could have given institutional investors an unplanned exit from prior longs. It also provided a buying opportunity. That could have disrupted the normal Aug/Sep trend. Since that trend is well known, there may be a fair number of shorts waiting for the weakness to begin. If the S&P makes a new high and continues to climb it would cause them to cover and reverse positions leading to higher highs.
Clearly, this is just speculation but the market is not acting like there is a decline in our immediate future. Again, there is never any guarantee of direction.
As I wrote in the market commentary, money is rotating out of small caps and techs and back into industrials and defensive stocks like healthcare and consumer products. The S&P A/D line closed at a new high while the Nasdaq A/D is in danger of a breakdown. This is a clear sign of rotation.
The S&P Bullish Percent Index showed a minor improvement with 65.2% of stock now having a buy signal. This is the highest percentage since February. Bear in mind that the big cap tech stocks are in the S&P so their decline has slowed the S&P's advance.
Another clear sign of improvement is the surge in S&P stocks over their 200-day average. This means a lot of marginal stocks that had been languishing at lower levels have begun to find buyers. This is also a positive sign.
The next resistance for the S&P is 2,850 and then uptrend resistance and 2,872 which should converge late next week. This is going to be a tough test for the S&P and one that could have lasting implications.
The A/D line on the Dow also closed at a new high with only 3 Dow components posting losses on Friday. If there is an impending deal on trade, the Dow should explode higher when it is announced. This is a bullish chart.
The Dow remains the lagging index but the trend is still positive. If we can get a higher high print this week at 25,600, we could see a minor surge and possibly take out that resistance at 25,800. Uptrend resistance around 26,000 is the next major battle.
The Nasdaq Composite is showing signs of life with half of the big cap techs positive the last couple of days. Friday's mediocre 9-point gain is a question mark. If we can get a decent gain on Monday to put us back at uptrend resistance, then we can get a decent test of market strength. That could be a make or break point for August.
The correlation between the FANG stocks has fallen apart. It could take weeks for them to fall back into reasonable parity.
The chip sector is rebounding and that is supporting the Nasdaq to some extent. The FANG stocks have a much larger impact at the present time.
The Russell is a market indicator. Normally the Russell leads both up and down but the various sector rotation moves over the last several months has thrown the indexes out of balance. Money is rotating out of the Russell and into big caps. Until these money flows equalize and the tariff issue starts to resolve, we are likely to get additional Russell volatility and lack of direction.
The correlation between the Dow and Russell has almost come back into balance after a wide swing in June and July.
The AAII Sentiment Survey has completely reversed the bullish sentiment from a couple weeks ago. Bullish sentiment is now the lowest component where it was the highest on July 12th at 43% and on June 14th at 44.8%. Investors are as confused as they have been all year. With neutral sentiment hovering around 40% over the last three weeks, uncertainty reigns.
While the next nine weeks tend to be treacherous, there is no guarantee of negativity. We need to trade what the market gives us and not become predisposed on direction. Remember, 2 or even 3 days is not a trend. It could be a start of a trend but we need to watch volume and the A/D line before making major commitments. Higher volume on positive days is a confirmation signal. Higher volume on down days is also confirmation.
Enter passively and exit aggressively!
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