Bearish. August is the worst month of the year since 1988. Average losses over the last 30 years range from 0.3% by NASDAQ to 1.2% by DJIA. In midterm years since 1950, Augusts’ rankings improve slightly: #8 DJIA, #9 S&P 500, #11 NASDAQ (since 1974). Average losses range from 0.4% for S&P 500 to 1.8% for NASDAQ. DJIA suffered double-digit losses in 1974, 1990 and 1998.
Unwavering. July strength helped sustain bullish investor sentiment. According to Investor’s Intelligence Advisors Sentiment survey bulls are at 55.3%. Correction advisors are up modestly to 26.2% and Bearish advisors are just 18.5%. Thus far Q2 earnings season has supported the bulls with the vast majority of companies reporting better than expected numbers. As long as the trend of better-than-expected reports continues, the market is likely to continue to climb the wall of worry.
Firm. U.S. unemployment ticked higher to 4.0% earlier this month, but remains solid. Atlanta Fed GDPNow model is currently forecasting Q2 growth of 4.5%. Tariffs and U.S. dollar strength could have an impact on corporate earnings, but it will likely be limited as China will support its exporters by weakening the yuan and other stimulus efforts.
Conflicted. NASDAQ traded at new all-time highs earlier this month, but DJIA and S&P 500 are still lagging. DJIA’s chart is the weakest as the gap between its 50- and 200-day moving averages continues to shrink while DJIA is currently just above its 50-day moving average. Even Russell 2000 is beginning to show signs of weakness as it failed to trade at new highs this month. The divergences between the major indexes are still not a bullish indicator.
1.75-2.00%. The Fed’s next meeting will end on August 1 and the current probability of a rate increase at this meeting is just 2.5% according to CME Group’s FedWatch Tool as of July 24. The Fed has raised rates seven times thus far and they are shrinking their balance sheet. This combination of monetary policy tightening is beginning to raise concerns that they may go too far. Already there have been calls for a pause in rate increases. The Fed could be the market’s and the economy’s worst enemy if they tighten too quickly or too much.