Brexit day finally arrived. Unfortunately, we will not know the official results until much later tonight at the earliest and possibly not until the early morning hours of tomorrow, if the vote is close. Nonetheless, this fact did not stop European markets from rallying or our market from following suit. The fact that the vote is not legally binding and the reality that any Brexit would likely be a multi-year process may be setting in. Or perhaps the potential risks and the market’s initial reaction were overblown.
The point being, we are not likely going to wake up one day to learn that the United Kingdom has completely bailed on the European Union. Today’s vote may begin a process in which the U.K. begins to exit. It could be partially or fully, only time would tell exactly. Like other past political and economic events, such as the collapse of the Soviet Union, there will be traders and investors that sell first and ask questions later. Or in the case of sovereign bonds with negative yields, buy first. Regardless of the event or shock, the market has largely continued on once the shock or event passed. When today’s vote finally comes to a close, the market is likely to shift its focus back to fundamentals, technicals and of course the Fed and interest rates–at least until the next shock happens.
Last week, the Fed threw a cold bucket of water on its economic growth outlook which is a fundamental negative, but as a result also acknowledged that interest rates are likely to remain low, longer. This is a potential positive that could offset the drag of tepid growth. Today’s initial weekly jobless claims were also better than expected suggesting the U.S. labor market is at a minimum resilient. The market is bouncing back in the short-term. In the longer-term, the Presidential election is heating up and solid, sustainable growth remains elusive.
NASDAQ’s Mid-Year Rally
Every year when the days get long and the temperature rises on Wall Street, we always hear those infamous buzzwords, the “Summer Rally.” As volume begins to shrink the hopes for a Summer Rally catch the ear of investors. On page 72 of Stock Trader’s Almanac 2016 we illustrate that yes, there is a Summer Rally, but there is a rally for all seasons and the one that occurs in summer is weakest. Yes the market has performed well in a few summers (2013, 2009 & 2003 are some recent notable exceptions), but as a rule it generally does not. Any outsized summer gains have been predominantly due to extenuating circumstances and/or after a sizable correction or bear market.
NASDAQ however, delivers a short, powerful rally that starts at the end of June. The accompanying table shows NASDAQ averaging a 2.2% gain since 1985 during the 12-day period from June’s third to last trading day through July’s ninth trading day. This year the rally could begin around the close on June 27 and run until about July 14.
In the mid-1980s the market began to evolve into a tech-driven market and control in summer shifted to the outlook for second quarter earnings of technology companies. This 12-day run has been up 23 of the past 31 years. Since the bursting of the tech bubble in 2000, NASDAQ’s mid-year rally has a spotty track record with seven appearances and six no-shows in the past thirteen years. However, it has been respectable for five of the last six years including a whopping 7.5% advance in 2013.
Consistent end-of-Q2 weakness, especially in the week after June’s option expiration week, also contributes to the setup of NASDAQ’s mid-year rally. Any weakness, particularly sharp, brisk declines near the end of June can make great entry points as the first trading day of July is generally strong and the full-month of July is the best month of the third quarter.
In the above chart of PowerShares QQQ (QQQ), this long trade appears to be setting up once again this year. QQQ found support at projected monthly support (green dashed line) and has managed to hold its ground. Relative strength (RSI) is beginning to improve. Stochastics are also turning positive while its MACD indicator could confirm a buy signal soon.
QQQ could be considered on dips below $107.50. If purchased, a 1% trailing stop loss is suggested. Update the stop loss using QQQ’s daily closing price. If not stopped out, take profits at $112 or on the close on July 14. This trade will be tracked in the Almanac Investor ETF Portfolio which will be updated again on July 5.