July Outlook: June Swoon Indicates Time to Take More Risk Off For Summer
By: Jeffrey A. Hirsch & Christopher Mistal
June 28, 2018
So far our June 21 NASDAQ Best 8 Months Sell Signal has turned out to be rather timely. From our November 28 Buy Signal to our June 21 Sell Signal NASDAQ gained 11.6%. Both NASDAQ and the Russell 2000 have given back sizeable ground since June 21. The Dow and S&P 500 have been in selloff mode a bit longer since June 13. 
As of yesterday’s close this June Swoon had brought the Dow and S&P 500 into negative territory for the month of June and put NASDAQ at a hair above flat. The Russell 2000 small cap proxy index, which was leading the market for most of this spring, held up better during the recent slide. 
We have been getting on the defensive since our May 2 Dow and S&P 500 Best Six Months Sell signal and it now looks like seasonal and geopolitical pressures are beginning to take a toll on the market. In yesterday’s blog post we noted the technical damage NASDAQ has suffered and how our defensive positions in Utilities, a top performing sector in the “Worst Six Months,” has been ripping lately. 
Other stocks from our Defensive Basket we released on June 14 in the other top performing Worst Six Months sector in Healthcare, Information Technology and Consumer Staples have also begun to move. Spice and seasonings concern McCormick (MKC) popped 8.4% today on its Q2 earnings beat.
As June and Q2 come to a close stocks are trying to mount a rally and July is the best month of the third quarter. It remains to be seen if NASDAQ’s perennial mid-year rally can materialize and lift all stocks. But if it does it will provide ample opportunity to unload underperforming and unwanted positions and firm up your summer portfolio defense.
You can see in the updated chart below of the S&P 500 4-Year Cycle Seasonal Patterns that the blue chip index failed at resistance (red-dotted line) and did not clear the March highs. Aside from the new Defensive Stock Basket we are solidly in risk off mode. The Best Months are over, summer is worse in midterm years and the rhetoric and developments in the geopolitical arena are conspiring to spook the market.
[S&P 4-Year Cycle Seasonal Pattern Chart]
GE’s boot from the Dow doesn’t seem to be helping matters either. And as we enter deeper into the bearish season several matters could jolt market. Trump’s scheduled tête-à-tête with Putin and the ongoing trade and tariff battles are bound to give markets a scare. Then there is the pressure of rising oil prices and the sudden bout of cold feet we are hearing from the Fed as inflation begins to percolate. High market valuations may be succumbing to bearish seasonality and midterm politicking as the market is on the brink of a technical breakdown through support.
So, stick to the drill and keep your powder dry. Raise some cash. Continue to weed out losing or lagging positions, pick up some more defensive holdings and wait for that fatter pitch we anticipate later in Q3 or early Q4 as we hit the sweet spot of the 4-Year Cycle.
Pulse of the Market
Even before we issued our NASDAQ Seasonal Sell Signal on June 21, DJIA had begun to weaken and was heading towards its 50-day moving average. DJIA continued to weaken and closed below its key 200-day moving average this Monday (1). This was the first time since June 27, 2016 that DJIA closed below its 200-day moving average. Currently, DJIA is on track for its fourth consecutive close below its 200-day moving average. This has not occurred since early 2016 when DJIA was in the throes of a Ned Davis defined bear market. Both the faster and slower MACD indicators applied to DJIA (2) are currently negative and trending lower confirming the recent swing in the market’s trend.
DJIA logged its fifth Down Friday/Down Monday (DF/DM) of 2018 (3) during its first 8-consecutive trading day losing streak since March 2017. Historically, a DF/DM warning has been followed by additional losses sometime during the next 90 calendar days in the vast majority of occurrences while 8-day losing streaks have also been challenging to recover from. Tariffs, midterm elections and what the Fed will do with interest rates are some of the major reasons causing market volatility to spike.
While S&P 500 (4) and NASDAQ (5) gained ground for four straight weeks, DJIA struggled to keep pace declining twice in the same period. This divergence in June is not uncommon as technology and small-caps shares have historically enjoyed greater gains in June.
Market breath remains generally positive with NYSE Weekly Advancers out numbering NYSE Weekly Decliners in three of the last four weeks (6). Two weeks ago when breath wasn’t positive, S&P 500 and NASDAQ still posted weekly gains. New Highs and New Lows (7) are no longer trending in a positive direction instead New Lows are expanding and New Highs are shrinking. This week’s stats could keep this poor trend in place.
30-year Treasury bond yields (8) continue to linger just above 3% suggesting long-term growth and inflation are likely in check. The 90-day Treasury yield appears to be plateauing right around 1.90%. Whether or not 90-day Treasury yield holds near current levels will largely depend upon what the Fed does in the short-term.
Click image to view full size…
[Pulse of the Market Table]
Disclosure Note: At the time of this writing, officers of the Hirsch Organization, or accounts they control held a position in ABT, AGG,AQN, BUSE,  IBB, INTC, JDST, KLAC, LRCX, MKC, MO, ORBK, TEL, WDC, TLT, XLU and XLV. They did not hold any other positions in the other stocks mentioned in the Alerts linked here, but may buy or sell at any time.