Please take a moment and register for our member’s only webinar, August 2023 Outlook and Update on Wednesday August 2, 2023, at 2:00 PM EDT here:

 

https://attendee.gotowebinar.com/register/1042037289221933401        

 

Please join us for an Almanac Investor Member’s Only discussion of recent market action with time for Q & A at the end. Jeff and Chris will cover their outlook for August, review the Tactical Seasonal Switching Strategy ETF, Sector Rotation ETF, and Stock Portfolio holdings and trades. We will also share our assessments of the Fed, inflation, the "Worst Months" as well as relevant updates to seasonals now in play.

 

If you are unable to attend the live event, please still register. Within a day of completion, we will send out an email with links to access the recording and the slides to everyone that registers.

 

After registering, you will receive a confirmation email containing information about joining the webinar and a reminder message.

 

 

7/27/2023: Dow 35282.72 | S&P 4537.41 | NASDAQ 14050.11 | Russell 2K 1954.90 | NYSE 16270.60 | Value Line Arith 9658.51

 

Seasonal: Bearish. August is the worst DJIA and second worst S&P 500, NASDAQ, and Russell 2000 month over the last 35 years, 1988-2022 with average performance ranging from 0.1% by NASDAQ to a –0.9% loss by DJIA. In pre-election years, August improves modestly based upon average performance, #8 DJIA, #9 S&P 500, #10 NASDAQ and Russell 2000. 

 

Fundamental: Not bad. Q2 GDP, released earlier today, came in better than expected at 2.4%. This is an improvement over Q1 suggesting the economy is accelerating again. Inflation metrics are generally encouraging as the trend lower has remained intact, but year-over-year comparisons are going to be tougher going forward. Oil’s quiet climb higher this month also adds pressure to future readings. Corporate earnings have been generally favorable against an arguably low bar. Employment data has been solid with the unemployment rate at 3.6%.

 

Technical: Mixed. DJIA, S&P 500 and NASDAQ all traded at new recovery highs in July. NASDAQ fizzled just after mid-month essentially right on cue as its historical Midyear Rally ended. DJIA stormed out with a 13 straight day winning streak (tied for second best ever) while S&P 500 largely drifted slightly higher. Today’s reversal, if not shaken off quickly, could be the start of a typical summer pullback.

 

Monetary: 5.25 – 5.50%. As expected, the Fed raised another 0.25% at its July meeting this week. Whether or not that will be the last increase is still unknown and will largely depend on the trajectory of inflation metrics. Year-ago inflation comparisons are going to get tougher and the path to the Fed’s stated 2% inflation objective remains unclear. 

 

Sentiment: Frothy. According to Investor’s Intelligence Advisors Sentiment survey Bullish advisors stand at 55.6%. Correction advisors are at 25.0% while Bearish advisors numbered 19.4% as of their July 26 release. Bullish sentiment has returned to the caution zone. It could drift higher still if the market quickly shakes off today’s reversal. Nonetheless, the conditions for a typical summer correction are beginning to make an appearance.

 

Let’s preface this month’s outlook by reiterating our bullish stance for pre-election year 2023. Our best-case scenario forecast from the December 2022 issue for “Above average pre-election-year gains of 15-20%,” is clearly in play again. At yesterday’s highs, the Dow was up 7.2% year-to-date and S&P 500 was up 18.9%. Tech stocks hit their highs last week with the NASDAQ Composite up 37.2% and the NASDAQ 100 up 44.8% YTD!

 

Many of you may remember back in early 2023 during one of our members-only webinars, after the market hit our bullish January Indicator Trifecta when we first leaned toward the best case scenario, that our biggest concern was that we were not bullish enough. We remain bullish for 2023 but we do expect the market to pullback here and correct 5-10% or so over the next three months, August–October, before heading toward new highs again in Q4.

 

As we stand on the threshold of the worst two months of the year, August and September, the bullish market wave may be breaking. Our favorite sentiment indicator is at rather frothy levels associated with pullbacks and corrections. In this week’s Investors Intelligence US Advisor Sentiment Report, bulls increased to 55.6%, the highest level since November 2021 when they hit 57.2%. Bears ticked up as well to 19.4% from 18.0% the week before, which was the fewest bear count since early in January 2022. This meant there were fewer advisors in the correction camp, the fewest since the start of this year. 

 

The venerable John Gray, longtime editor of Investors Intelligence, noted that, “As contrarians, we note the market rarely fulfills expectations, so the contraction in their [correction] numbers may mean the chances for a short-term market setback is increasing.” (Full disclosure we are one of the “correction” advisors in the survey.)

 

In his Late Morning Update today our friend and legendary market analyst, Art Cashin, Director of Floor Operations for UBS at the NYSE warned, “Keep an eye on yields. They are starting to inch up and I am a little anxious that the VIX dipped back below 13. The sentiment indicators are on the verge of going parabolic to the over-enthusiastic side.” 

 

At this writing on Thursday afternoon, the market has reversed course, breaking the Dow’s vaunted 13-day winning streak, as the 10-year yield poked above 4% driven by hawkish rhetoric from the Fed at yesterday’s FOMC meeting and the better-than-expected GDP reading of 2.4% that came out today. You may also remember the concern we conveyed about a rise in the 10-Year Treasury Yield back in the March member’s webinar. Clearly the uptick in the 10-year has spooked the stock market. Perhaps this is the beginning of a summer correction. 

 

NASDAQ’s parabolic rally the past two months has created a weakly supported cantilevered shape. In our trusty seasonal pattern chart below. It’s uncanny how NASDAQ continues to track these historical trends and appears to have made a short-term top right on cue at the typical mid-July point. We would not be surprised if the market tracked the more dramatic corrections in the blue pre-election year line with an early August low, a late September pullback and then a final selloff near the end of October.

 

 

The market is clearly primed for a summer correction. In the next chart below of NASDAQ with our recent June 23 Seasonal MACD Sell Signal highlighted the monthly pivot points show the market struggling at red-dotted line monthly pivot point resistance. A correction from the recent high of 14358 to the green-dotted monthly pivot point support of 13173 would be an 8.3% correction. 

 

 

So, let’s try to ride this breaking bullish wave into the summer doldrums and then paddle out again at the beginning of the Best Six Months for the next bullish set that should carry the market well into election year 2024.

 

 

It took more than six months, but DJIA has finally broken out above its old recovery closing high from last November (1). The breakout has been accomplished in near record-tying fashion as DJIA attempted to extend its daily winning streak to 14 days today. A winning streak that has existed since June 1897 (this is not a typo). Ultimately, DJIA’s streak did end today at 13 days. That ties it with the second longest streak of 13 straight days back in January 1987.

 

DJIA’s new life has begun pulling its 50- and 200-day moving averages bullishly higher. Both the faster and slower moving MACD indicators are also bullish and trending higher (2). But much of the recent action is eerily reminiscent of last year’s summer rally that eventually gave way as 10- and 30-year Treasury bond yields began climbing toward 4%.

 

 

June’s pair of Down Friday/Down Monday (DF/DM) occurrences (3) set the stage for typical week after quarterly options expiration weakness and NASDAQ’s Midyear Rally. As is often the situation, DJIA (4) and S&P 500 (5) also participated in the rally with gains in three of the last four full weeks. However, NASDAQ (6) did weaken just after mid-July. As of today, July 27, NASDAQ is holding onto a modest weekly gain, but could easily slip further and record a second straight weekly loss. If this were to transpire, it would be the first time this year that NASDAQ declined in two straight weeks.

 

Over the last four weeks, market breadth was mostly in line with weekly moves. Weekly Advancers solidly outnumbered Weekly Decliners in positive weeks and vice versa in negative weeks. Last week’s NASDAQ decline was the exception and potentially an early indication of brewing trouble (7). A mixed reading this week will add to concerns going forward.

 

Once again Weekly New Highs (8) have failed to exceed their recovery peak of 356 during the week ending February 3, 2023, even as DJIA, S&P 500 and NASDAQ climbed to new 2023 highs in July and beyond. Weekly New Lows did taper off over the past four weeks but are also greater in number now than they then in February. The market is enjoying a nice bull market summer rally, but the rally is also beginning to show signs of cooling.

 

After briefly leveling out in June, yields (9) resumed climbing higher in July in advance of this week’s Fed rate increase. The swift rise of the 90-day Treasury yield is the result of the Fed, while the 30-year Treasury is nearing 4%. As longer-dated yields climb, pressure could mount on the banks that are holding too many of them in anticipation of a recession that does not appear to be arriving anytime soon.

 

 

Money flows from harvesting made August a great stock market month in the first half of the Twentieth Century. It was the best DJIA month from 1901 to 1951. Now it is the worst DJIA and second worst S&P 500, NASDAQ, Russell 1000, and Russell 2000 month over the last 35 years, 1988-2022 with average performance ranging from 0.1% by NASDAQ to a –0.9% loss by DJIA. Last year, DJIA, S&P 500, NASDAQ, and Russell 1000 all declined over 4% in August. 

 

Contributing to this poor performance since 1988; the second shortest bear market in history (45 days) caused by turmoil in Russia, the Asian currency crisis and the Long-Term Capital Management hedge fund debacle ending August 31, 1998, with the DJIA shedding 6.4% that day. DJIA dropped 1344.22 points for the month, off 15.1%—which is the second worst monthly percentage DJIA loss since 1950. Saddam Hussein triggered a 10.0% slide in August 1990. The best DJIA gains occurred in 1982 (11.5%) and 1984 (9.8%) as bear markets ended. Sizeable losses in 2010, 2011, 2013, 2015 and 2022 of over 4% by DJIA have widened its August average decline.

 

 

In pre-election years since 1950, Augusts’ rankings improve modestly: #8 DJIA, #9 S&P 500, #10 NASDAQ (since 1971), #11 Russell 1000 and #10 Russell 2000 (since 1979). Average performance in pre-election years is positive except for Russell 2000. However, all five indexes have declined in August during the last three pre-election years, 2019, 2015 and 2011. It would appear, August’s pre-election year advantage is fading.

 

 

Historically, the first eight or nine trading days of the month have exhibited weakness while mid-month has been better. This pattern holds in pre-election years with greater magnitude (dashed lines). Note the bullish cluster from August 15 through 17. This strength is visible above on trading days 11, 12 and 13. The end of August tends to be softer when traders evacuate Wall Street for a summer finale. The last five days were generally bearish from 1996 to 2013 but have been positive in seven of the last nine years. In 2022, S&P 500 dropped 4.5% in the last five trading days of August. S&P 500 has also only been up nine times on the penultimate day of August in the past 27 years.

 

On Monday of monthly options expiration DJIA has been up 18 of the last 28 years with four up more than 1%. Monthly expiration Friday has been mixed recently with 18 declines in 33 years. More recently, DJIA has been up in four of the last five years after declining in seven of the previous eight. Expiration week is down 20 times in 33 years since 1990, with some sizable losses; –2.6% in 1990, –2.3% in 1992, –4.2% in 1997, –4.0% in 2011, –2.2% in 2013 and –5.8% in 2015. The week after expiration is stronger up 20 of the last 32.

 

 

 

NASDAQ’s midyear rally hit a soft patch at the start of the month, but as of today’s close it has gained 4.3% since the close of trading on the fourth from last trading day of June. NASDAQ has historically averaged 2.4% over the 12-trading day span that defines its midyear rally. The midyear rally officially ends on the close tomorrow, July 14. The end of the midyear rally often coincides with the start of typical second half of July weakness. This year the rally could persist a bit longer, but it will likely pause before the Fed meets again on July 25 and 26.

 

This year’s midyear rally was kicked into overdrive by a softer than expected June jobs report followed by better than anticipated readings of CPI and PPI. A softening labor market and cooling inflation are widely regarded as the key metrics the Fed is monitoring for signs of when it may stop raising interest rates. This month’s data appears to support the assumption that the Fed’s inflation war could be nearing an end. But it may not yet be time to begin celebrating or to jump back into tech stocks.

 

 

In the above chart we can see the 12-month change in CPI (consumer price index), PPI (producer price index) and PCE (personal consumption expenditures). PPI peaked in March of last year while CPI and PCE peaked three months later in June. In the 12 months since the June peak in 12-month CPI and PPI, comparisons were getting easier and easier as the 12-month ago reference rapidly accelerated up the left side of the dome. Going forward the reference for the 12-month period will not be climbing as quickly. As a result of this, there is essentially only one path to a 2% or lower 12-month CPI anytime over the next year.

 

 

In the above chart we have plotted the 12-month historical change in CPI from January 2020 through its most current reading for June 2023 (black line). From the current level we have projected CPI out 1 year based upon monthly increases of 0.1%, 0.2%, 0.3%, 0.4% and 0.5%. To achieve the Fed’s stated 2% annual inflation target, CPI will need to be no more than 0.1% higher per month in each of the next six months. If this were to happen CPI’s 12-month change would be under 2% in January 2024. If monthly changes in CPI hover around 0.2%, it will reach a low in February 2024 and move sideways. Any consistent monthly increases above 0.2% results in 12-month inflation accelerating higher again. It is also notable that all five projections produce an increase next month.

 

Market confidence and sentiment may be on the rise and bullish now, but the path back to 2% annual inflation looks murky and the Fed could be forced to either remain hawkish longer or accept a higher level of inflation going forward. With crude oil rising from under $70 per barrel in late June to over $77 today, pressure is already mounting on July’s inflation metrics. The Fed could easily disappoint the market later this month and be a catalyst for choppy, volatile trading in August and September and possibly into October.

 

 

Over the last five weeks since the last update through yesterday’s close (July 13), S&P 500 advanced 2.4% and Russell 2000 advanced 4.8%. Over the same period the entire portfolio climbed 1.0% higher, excluding dividends and any trading fees. Mid-cap positions once again contributed the most, up 9.9% while small caps and large caps advanced 5.0% and 1.3% respectively. Although the overall portfolio gain was modest over the last month, it was sufficient to push the portfolio to a new all-time high.

 

AI-related stocks, Super Micro Computer (SMCI) and Axcelis Technologies (ACLS) remained the stars of the portfolio. Both traded at new all-time highs recently. SMCI closed at a new all-time high today and ACLS did the same on June 30 and remains close to that level today. Accounting for selling half of the original position when ACLS and SMCI first doubled, they were up 115.1% and 168.8% respectively on July 12. SMCI is also the largest holding in the Russell 2000 index. SMCI and ACLS are on Hold. Suggested stop losses have been updated to reflect recent gains.

 

Large-cap healthcare stocks, Elevance Health (ELV) and UnitedHealth Group (UNH) continued to struggle over the past month. ELV closed below its stop loss on July 12 and was closed out today. UNH closed below its stop loss today. UNH is scheduled to report earnings and hold a conference call tomorrow morning before the market opens. It would likely only take a modestly positive outlook to push shares back above $450. If UNH can reclaim that level and close above it, we will not close out the position. However, if UNH does not bounce, it will officially be closed out on Monday, July 17.

 

All positions not previously mentioned are on Hold. The “Worst Months” are here, and NASDAQ’s midyear rally officially ends tomorrow. Inflation metrics have been trending lower, but with energy on the rise again that trend could be challenged which in turn would be a headache for the Fed and then the market.

 

 

In case you missed the member’s only webinar on Wednesday, the slides and video recording are available here (or copy and paste in a new browser window: https://www.stocktradersalmanac.com/LandingPages/webinar-archive.aspx). In the webinar we reviewed key seasonal pattern charts that we have been tracking throughout the year, current GDP and inflation trends, Fed interest rate expectations, the end of NASDAQ’s Best Eight Months and what we expect during the balance of the “Worst Months.”

 

We also examined the history of strong NASDAQ first halves and subsequent performance during the remainder of the year. NASDAQ finished the first half of 2023 with a 31.7% gain. This is NASDAQ’s third best first half ever. Only 1975 and 1983 were better. In the following table we compiled all years since 1971 when NASDAQ was up 20% or more in the first half. Reviewing the table, we observed only two times out of the past eleven where the second half of the year was better than the first half (1999 and 2003). July and Q3 were also below average following a 20%+ first half gain while Q4 was better than average.

 

 

This reinforces our existing tepid outlook for Q3 of this year. Today’s much stronger than anticipated jobs data has increased expectations for another Fed interest rate hike and added more uncertainty as to when the Fed will eventually pause. Increasing uncertainty is likely to lead to more volatility and a sideways to possibly lower market during the historically weak third quarter.

 

 

Three new sector seasonalities begin in the month of July. First up is a bearish seasonality in Transports which typically begins in the middle of July and lasts until the middle of October. This seasonality is based upon the Dow Jones Transportation index (DJT). Over the last 10- and 25-year time periods DJT has declined 1.23% and 6.25% on average during this weak timeframe. Industrials also exhibit similar weakness to the transports sector over nearly the same period.

 

iShares Transportation (IYT) is a top choice to establish a short position in to take advantage of seasonal weakness in the transport sector. IYT has nearly $1 billion in assets, has traded an average of over 100,000 shares per day over the past 30 days and has a reasonable 0.39% expense ratio. IYT’s top five holdings include: United Parcel Service, Union Pacific, Uber, Delta Air Lines, and Old Dominion Freight.

 

 

IYT has rallied briskly since the beginning of June and has broken out above its highs from last August, but the rally and breakout appear to be on the verge of failure. Stochastic, relative strength and MACD indicators are beginning to confirm the loss of momentum and possible change in trend. IYT could be shorted on a breakdown below $240.92. If shorted, set an initial stop loss at $252.97, this level is just above IYT’s recent intra-day high.

 

SPDR Industrials (XLI) will be our choice to establish a short position to trade seasonal weakness in the industrial sector. XLI has nearly $15 billion in assets and frequently has over 10 million shares changing hands daily. Its expense ratio of 0.10% is very reasonable. Top five holdings of XLI include: Raytheon Tech, Honeywell, United Parcel Services, Caterpillar, and Union Pacific.

 

 

XLI’s chart and technical indicators do not differ much from the chart of IYT. XLI even experienced the same brisk June rally. XLI has also broken out of a trading range, but its rally appears to be losing momentum as well. XLI could be shorted on a breakdown below $103.90. If shorted, set an initial stop loss at $109.10, this level is just above the closing high on the first trading day of July.

 

July’s final seasonality is for gold & silver mining stocks. This seasonality is based upon strength in the Philadelphia Gold & Silver index that typically begins in late July and lasts until late December. A hawkish Fed all but promising additional interest rate increases appears to be pressuring gold and silver. For now, we are going to pass on this trade as the current situation does not appear favorable.

 

 

Per last month’s update, First Trust Natural Gas (FCG) was sold on June 2 at $22.37 for a modest loss of 2.7% excluding dividends and trading fees. FCG did trade above its original price in June but failed to make any meaningful move higher. Even though this trade did not work out this year, the damage was minimal.

 

SPDR Gold (GLD) was stopped out on June 29 when it closed below its stop loss. It was closed out of the portfolio on the next trading day at $177.18. In addition to the expanding prospects of higher interest rates, the relatively quick resolution to the federal debt ceiling limit at the beginning of June has dampened investor demand for gold.

 

Positions in sectors that have historically performed during the “Worst Months,” XBI, IBB, XLP, XLV and XLU are on Hold.

 

 

 

Per our Seasonal MACD Sell for NASDAQ emailed after the close on June 23, Invescos QQQ (QQQ) and iShares Russell 2000 (IWM) were sold and closed out of the portfolio on June 26. QQQ recorded a 29.2% gain since our Seasonal Buy Signal last October. IWM struggled during the Best Months, but still managed a 4.7% gain excluding dividends and any trading fees.

 

For the first time in nearly two decades, the cash from the sale of “Best Months” positions can earn a reasonable return. In addition to the bond ETFs in the portfolio, money market funds, short-duration Treasuries and similar are also acceptable alternatives. With the Fed signaling more interest rate increases are likely, we currently prefer short-duration focused funds and ETFs. SHV and SGOV can still be considered at current levels. 

 

Please note that many sites and data sources will display a trailing 12-month yield for SHV and SGOV. This may not reflect present yields as interest rates were not at their present levels one year ago. The 30-day SEC yield found on the issuer’s website should be more reflective of current yields and can be found by visiting https://www.ishares.com/us.