Week In Review / July Recap

The S&P 500 continued to take a bit of a breather this week as it continued to digest late-June's / early-July's strong gains.  The index finished the last five days of the month essentially unchanged, falling just 0.07%.

And to be honest, "a bit of a breather" is an understatement.  Over the last two trading weeks, the index has stayed in one of the tightest ranges in its history.  In the last 11 days, the S&P has traded in a 0.61% range (based on closing prices) which makes it the tightest movement over that timeframe since August of 1995.  The research team at LPL Financial ran the numbers on how these tight ranges have tended to resolve themselves.  A number of other research groups also made note of the dull market conditions over the back half of the month.

The NASDAQ on the other hand continued to power higher with an assist from upside earnings surprises by a number of tech's biggest names including Facebook, Apple, Google/Alphabet and Amazon.  The index finished the week with a gain of 1.2%, leading all of the major US equity indexes.

Along with the NASDAQ, the Russell 2000 was also able to finish the week in the black.  This was a theme that played out over the entire month as small caps and the NASDAQ led the way higher with each up more than 5% in July. 

After the massive rebound off the Brexit chaos, all US stock indexes sit comfortably in positive territory in 2016 as we enter the seasonally challenging August - October timeframe.

As the markets and the economy have accelerated in recent weeks and proven immune (for now at least) to whatever fallout may come from Brexit, we've seen renewed talk of the possibility of the Federal Reserve moving to raise rates before year-end.   And while those discussions may have picked up in pace, futures markets are still betting against such a move.  Per Briefing.com: "Rate hike expectations receded throughout the past week. Since last Friday, the implied probability of a rate hike in December, estimated by the fed funds futures market, declined from 47.8% to 33.0%. The fed funds futures market does not expect the Federal Reserve to depart from its current target range until after July 2017."

As mentioned above, August and September have tended to be some of the more volatile months for stocks.  Urban Carmel noted that since 1945 of all the months where the S&P has fallen 5% or more, August and September have combined to provide more than a third of them.  Additionally, August has proven to be the weakest month on average for the S&P over the last 20 years.

So we go into August with stocks at all time highs, trend and breadth looking remarkably strong, earnings season has been respectable and the economic data points suggest a turn better.  Couple that with the tendency for tight ranges like we've seen in recent weeks to resolve higher and it's easy to anticipate further gains for equities.  However, one must consider the historical seasonal weakness of the coming 30-60 days and be prepared for the potential of another quick pullback.  

Timeframes are everything right now and we're prepped with an open mind to consider all scenarios.

Week In Review (7/11 - 7/15)

The markets continued their post-Brexit giddiness this week by gapping higher at every open and finishing higher every day but Friday.  All told the S&P was up 1.15% for the week and sits higher by 3% so far in July.

It wasn't just US stocks that traveled higher this week as international and emerging market stocks (EFA & EEM), commodities, bonds and the US dollar all made advances.  

The S&P is now attempting to confirm its recent breakout to new all-time highs and hold above the 2,130 level that stayed insurmountable for over a year.  We continue to see incredible breadth measurements that suggest this time may be the real deal.  Yet n the very near term we wouldn't be shocked see stocks back off a bit as we're just a little overheated here.  At the same time, the VIX has had a tendency in the past to bounce at these levels (closed Friday at 12.67) suggesting that a pickup in volatility is due.  And as earnings season kicks into high gear this week we may now have the ingredients necessary to see that happen.

We wanted to share a recent study we ran in search of finding markets with similar characteristics.  One that produced some interesting results (no bias here) had the following constraints:

-We used the Dow Jones Industrial Average through June 30th
-We looked for markets with a down trending 200-day (40-week) Moving Average
-We wanted to see a recent uptick in this moving average (weekly close greater than prior week)
-And we wanted to be within 6% of highs on the Dow

Below are all the instances going back to the 1950s and there's some takeaways to note:

1) The average returns are slightly weaker almost across the board relative to the entire sample

2) There's notable weakness in the forward 2 and 3-month timeframes

We've seen some stories comparing the current market to 97-98 currency crisis markets but one big difference we'd be quick to note is that from 1995 to 2000 the 200-day MA on the Dow was trending up pretty much the entire time.  A more similar market might be from 1956-1958 (seen in 2nd chart below) where you actually had the 200-day MA flatten out/decline for a period of time much like now.  That market whipped around for a few years, experienced a decent sized flush and then went on to put in much higher highs from 1959 onward.

We'll see if the breakout that's underway can sustain and we're able to buck the trend of the 2 and 3-month weakness that we've seen in past instances.

1983-2016

1950-1983 - *(1956-1958)*