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 the 50th Anniversary Stock Trader’s Almanac for 2017 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 the 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 2.4% 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 17.
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 24 of the past 32 years. After the bursting of the tech bubble in 2000, NASDAQ’s mid-year rally had a spotty track record from 2002 until 2009 with three appearances and five no-shows in those years. However, it has been quite solid over the last seven years, up six times with a single mild 0.1% loss in 2015. Last year, NASDAQ advanced a whopping 9.6% during the 12-day span.
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 in the process of setting up once again this year. QQQ is currently just above its 50-day moving average (solid magenta line) and projected monthly support (green dashed line). Stochastic, relative strength and MACD indicators are all negative and trending lower.
QQQ could be considered on dips below $135.95 or when its MACD Buy indicator (8,17,9) issues a buy crossover. If purchased, a 2% trailing stop loss is suggested. Update the stop loss using QQQ’s daily closing price. If not stopped out, take profits at $143.50 or on the close on July 17. This trade will be tracked in the Almanac Investor ETF Portfolio.