Neutral. July has been the strongest month of the third quarter. Midterm-year Julys have a mixed record ranking #3 for DJIA and #5 S&P 500, but for NASDAQ and Russell 2000 July is the worst month in midterm years. NASDAQ’s seasonal midyear rally ends on or around July 14. Early July gains tend to fizzle after mid-month. July is the first month of NASDAQ’s Worst Four Months, July through October.
Shaky. Third estimate of Q1 GDP was revised even lower to a –1.6% annual rate. Atlanta Fed’s GDPNow forecast of Q2 GDP has slipped to –1.0% as of June 30. Two consecutive quarters of negative GDP satisfies the traditional definition of a recession. Headline inflation has accelerated to a new multi-decade high. Official employment metrics remain firm, but the technology sector has slowed hiring and, in some instances, begun layoffs. Consumer sentiment has plunged to the lowest level on record according to University of Michigan’s final release in June. Corporate earnings could be the next to suffer.
Oversold Bounce? Countless key support levels have not held this year for DJIA, S&P 500 or NASDAQ. With several popular companies trading at or near pre-Covid levels, it is looking increasingly likely that DJIA, S&P 500 and NASDAQ return to pre-Covid levels before the bear market ends. DJIA has already come within a few hundred points of its February 2020 closing high of 29551.42. S&P 500 pre-Covid closing high was 3386.15 and NASDAQ’s was 9817.18.
1.50 – 1.75%. Surging inflation has forced the Fed to accelerate interest rate increases. The Fed is currently projecting a 3.1% to 3.6% target rate by year end. This is a sharp increase from where it was at the start of the year. Most of this increase is expected before Election Day in November. Election results and a Fed nearing the end of a tightening cycle could prove to be the catalyst for the market to find bottom later this year and rally into 2023.
Bearish. According to Investor’s Intelligence Advisors Sentiment survey Bullish advisors stand at 32.9%. Correction advisors are at 27.1% while Bearish advisors numbered 40.0% as of their June 29 release. Bears have outnumbered bulls for nine straight weeks now and for good reason. That has been the market’s trend the entire year with only the briefest of bounces. Overall, we still do not see bearish sentiment at a level that suggests outright fear and/or panic and this is what it will likely be when the current bear market nears its end.