July Outlook: Big June Gains Hazardous for July – Worst 4 Months Prep
By: Jeffrey A. Hirsch & Christopher Mistal
June 27, 2019
As you can see in the accompanying chart the U.S. stock market has been tracking rather close to the historical seasonal pattern for Pre-Election Years. As we have pointed out here the past several months, outsized gains are to be expected this year based on the Pre-Election Year pattern illustrated in the chart, especially following our positive January Indicator Trifecta. But we have also warned these gains would not come without pause and correction.
[Pre-Election Year Seasonal Patterns CHART]
After the third best first-four-month start to the year since 1950 for the S&P 500, up 17.5%, May was destined for weakness as it is also notoriously weaker in Pre-Election Years. But that augured well for June. Now that June has all but delivered with one trading day left for the month, the prospects for July and the Worst Four Months July-October are less than sanguine. June 2019 is on pace for its best June for the Dow since 1938, the S&P 500 since 1955 and NASDAQ since 1995. 
As we noted on the blog last week, historically July has been weaker after a positive June. However, even if July and the Worst Four Months suffer a correction or go sideways as we expect, the full year is still on pace for additional gains after the usual annual soft patch. Also visible in the chart is what we call Christmas in July for NASDAQ. This 12-day Midyear Rally for NASDAQ that runs from the last three trading days of June through the 9th trading day of July appears to be underway. 
June is the last month of NASDAQ’s Best 8 Months. Since June 1 we have been on the lookout for our NASDAQ Seasonal MACD Sell signal. June’s impressive move up and the potential for NASDAQ’s Midyear Rally to continue, is setting us up for a near-perfect Seasonal MACD Sell signal for NASDAQ as highlighted in yellow in the NASDAQ chart.
Following our May 1 Tactical Seasonal Switching Strategy Sell Alert for DJIA and S&P 500 we began shifting to a market neutral posture. We sold SPDR DJIA (DIA) and SPDR S&P 500 (SPY) positions as well as positions in SPDR Financial (XLF), SPDR Industrials (XLI), SPDR Materials (XLB) and iShares DJ Transports (IYT). We tightened up stops on our stock positions, added some bond ETFs as well as SPDR Consumer Staples (XLP). 
We have continued to hold Invesco QQQ (QQQ) and iShares Russell 2000 (IWM) and last week we issued our seasonal Defensive Stock Basket with 19 undervalued, growing stocks with solid dividends in the Healthcare, Staples and Utilities sectors, plus the two big Telecoms with monster yields.
U.S. equity markets are tracking seasonal patterns closely, which suggests reduced volume trading as folks begin the annual summer exodus from The Street and choppy sideways trading over the next four months. Technical readings and market internals are pointing to a market running out of steam. The world stage is featuring some challenging events. U.S. presidential campaign politics are now ramping up to full swing, highlighting domestic political disputes, standoffs and unfinished business. Diplomatic and trade issues also remain front and center. 
Major market gains promise to be hard to come by this summer and early fall. But after that we expect a run to new highs by yearend. So stick to the drill and resist getting sucked into the “summer rally” hype. Our posture remains market neutral and defensive.
Pulse of the Market
On June 20, DJIA closed within 76 points of its all-time high close of 26828.39 on October 3, 2018 (1). But that was it as DJIA has been slipping slowly lower ever since. S&P 500 did set a new all-time closing high on June 20, but absent support from other major indexes the feat has not been repeated yet. DJIA’s lost momentum is reflected in it slower and faster moving MACD indicators as both have begun to turn toward a new sell crossover (2). 
Dow Jones Industrials & MACD Chart
June’s brisk rally (and what looks to be a failed breakout attempt) appears to be winding to a close. After six straight weeks of declines, DJIA was due for a rebound and it has lasted three weeks (3). This week, DJIA is on track to end the weekly winning streak. S&P 500 (4) and NASDAQ (5) have also enjoyed three straight weeks of gains in June following May’s sizable losses and four week losing streak. This week’s mild pullback did setup NASDAQ and S&P 500 for a midyear rally that typically lasts until the ninth trading day of July.
Market breadth measured by NYSE Weekly Advancers and NYSE Weekly Decliners (6) has been solidly bullish throughout the first three weeks of June. This trend is also on track to come to an end this week even with a few days of mixed trading. 
Bullishly, Weekly New Highs (7) have been trending higher throughout June’s rally. During the week ending June 21, New Weekly Highs reached 502. This was the highest reading of the year and the most since the market topped in January 2018. An expanding number of New Weekly Highs is a positive especially when combined with a declining number of New Weekly Lows. This is one confirming sign that there was/is broad participation in the rally.
The 30-year Treasury bond yield has fallen to its lowest level since October 2016 (8). A partially inverted yield curve was signaling that the Fed had likely gone far enough with rate increases. This and the market’s May rout (along with trade and heightening international tensions) was apparently enough for the Fed to become even more dovish. The stage has been set for an interest rate cut or two in the near future.
Click for larger graphic…
Pulse of the Market Table