Bearish. July historically is the best performing month of the third quarter however, the mostly negative results in August and September make the comparison easy. July begins NASDAQ’s worst four months and is the third weakest performing NASDAQ month since 1971, posting a 0.4% average gain. Midterm-year July rankings are something of a mixed bag, ranking #5 for DJIA and #6 S&P 500, averaging gains of 1.1% and 0.7% respectively (since 1950); while NASDAQ (since 1974) midterm Julys rank #12.
Determined. Early June tech and small-cap strength helped buoy investor sentiment even as the market weakened recently. According to Investor’s Intelligence Advisors Sentiment survey bulls are at 47.6%. Correction advisors are up modestly to 34.0% and Bearish advisors are just 18.4%. Q2 earnings season will either confirm the bullish case or it could start to poke holes in it.
Firm. U.S. unemployment at 3.8% is solid. Atlanta Fed GDPNow model is currently forecasting Q2 growth of 4.5%. Corporate earnings forecasts remain solid for the balance of 2018 and into 2019, but recent U.S. dollar strength and tariffs could erode those estimates. Emerging and Chinese markets merit close attention as weakness there could have some spillover effects.
Divergent. NASDAQ was trading at new all-time highs earlier this month, but DJIA and S&P 500 were woefully lagging. As a result, NASDAQ’s chart is firmer. Recent weakness has caused DJIA to breakdown through its 200-day moving average; S&P 500 is trading between its 50- and 200-day moving averages while NASDAQ is still above its respective 50-day moving average. The divergences between the major indexes are not a bullish indicator.
1.75-2.00%. June’s Fed meeting came and went with little drama. Just as widely expected, the Fed did raise its federal funds rate 0.25%. The Fed’s next meeting will end on August 1 and the current probability of a rate increase during this meeting is just 4.0% according to CME Group’s FedWatch Tool. Monetary policy is tightening, but rates still remain low for consumers and corporations within historical context.