Seasonal:
Bearish. August is the worst DJIA, S&P 500, and NASDAQ month over the last 31 years, 1988-2018, with average declines ranging from 0.1% by NASDAQ to 1.1% by DJIA. In pre-election years, August has been better with modest average gains.
Psychological:
Complacent. According to Investor’s Intelligence Advisors Sentiment survey bulls are at 54.2%. Correction advisors are at 29% and Bearish advisors are 16.8%. Bulls did ease slightly from their previous level of 58.0% which was the high of 2019. A rate cut from the Fed, a debt-ceiling deal, increasing possibility of the ECB easing and trade deal hopes have all contributed to the sense of ease and calm. But what happens after the market seemingly gets everything it wants? Year-to-date gains would suggest a cooling-off period with a period of consolidation and perhaps a mild pullback during seasonally weak August and September.
Fundamental:
Soft Patches. Q2 GDP estimate from Atlanta Fed GDPNow is at just 1.3% as of July 25. It had been as high as 2.1% in June. Corporate earnings are also currently forecast to decline for Q2 and Q3 according to latest S&P Capital IQ consensus estimates. On the brighter side, the economy added 224,000 net jobs in June and the unemployment rate is a low 3.7% while inflation remains subdued.
Technical:
At resistance. DJIA, S&P 500 and NASDAQ all broke out to new all-time highs but have run into resistance and are struggling to maintain momentum and move higher. NASDAQ’s Seasonal Sell was triggered on the close on July 19. DJIA and S&P 500 technical indicators are also negative and trending lower. Major indexes are likely to struggle to make any major move higher over the next 2-3 months.
Monetary:
2.25-2.50%. Until the end of July when the Fed is expected to cut at least 0.25% and possibly 0.50%. This “insurance” cut maybe what the economy needs to alleviate some trade dispute uncertainty and put growth back on a positive and accelerating trajectory. Low rates have been supportive of markets as companies can easily and cheaply finance dividend increases and share buybacks.
JUL
2019