July Outlook: Climbing COVID Cases Threaten Rally
By: Jeffrey A. Hirsch & Christopher Mistal
June 25, 2020
Climbing COVID cases and confusion about reopening the economy continues to confound the market. Even though hard working people and prudent businesses around the country are working diligently to reopen and safely serve clients and customers the increase in positive tests and hospitalization nationally is hard for the market to ignore. 
Waiters are reminding diners to done their masks when ordering. Folks are waiting for the next elevator and not crowding in and business have hand sanitizer at the ready for all patrons. But Texas is pausing its reopening plan and new case rates and hospitalizations are rising to record levels in 16 states.
Nevertheless, the spread and uncertainty continue to make the market vulnerable to negative developments on the pandemic, economic and geopolitical fronts. Valuations are high. Technical chart resistance has become more prevalent and the incumbent president and party are on the ropes against the virus and civic unrest. 
Our NASDAQ Best Eight Months Seasonal MACD Sell Signal triggered on June 11, so we are in full “Worst Four Months” defensive mode. But there are still a few seasonal bright spots in July. July is the best month of the third quarter though most of July’s gains usually occur in the first half and then we have the August/September disaster area where the market is often weak as folks are preoccupied with outdoor activities in August and end-of-Q3 portfolio restructuring in September. 
NASDAQ’s mid-year rally over the 12-day period starting with the last three trading days of June through the ninth trading day of July, what we affectionately refer to as “Christmas in July,” has been up 27 of the last 35 years and the past nine out of ten years with an average gain over the 35-year stretch of 2.5% vs. 0.9% for the month of July as a whole.
NASDAQ Christmas in July Table
After the mid-year rally we are concerned that recent market resistance will become formidable again and support will be tested. Early in June S&P 500 stalled at our 3210 level, which is just below the intraday low on January 31 when we had the first major COVID scare selloff and the gap-down day on February 24. Then we found support near our 2955 level associated with several touch points and is right at the pink 50-day moving average.
[S&P Technical Chart]
S&P 3010 is an important level at the July and September 2019 highs. 3010 is also still right at the 200-day moving average. 3115 is where the big waterfall decline broke below the long uptrend line from the December 2018 low. A range in the 2955-3210 seems to be materializing, but 3115 is still putting up resistance at the moment. If 2955 does not hold as support, the next major support level is 2725 where the 50-day moving average turned higher back in May.
On the Election Cycle front things are still concerning. While the market has historically performed better when a sitting president is running for reelection, this year may be flashing an incumbent party defeat warning, which does not bode well for the next few months or the year as a whole. 
In the chart here we have plotted the one-year seasonal chart patterns for the S&P 500 during election years for 1949-2019 overlaid with 2020 year-to-date performance. Due to the magnitude of 2020’s bear market decline we have plotted it on the right scale in order to illustrate the trend comparison to election years during the 1949-2019-period versus incumbent party wins and losses. As you can see 2020 is tracking the trend of the red incumbent party losses line more closely.
[Incumbent Wins & Losses Chart]
We will also be keeping an eye on our good friend Sam Stovall’s, Chief Investment Strategist at CFRA, rather reliable “Presidential Predictor” indicator (see page 26 of the 2020 Almanac. When the S&P 500 is up from July 31 to October 31 during presidential election years the incumbent party retains power 11 of the 13 election years or 85% of the time since 1936. Losses for the S&P 500 over this 3-month span, just before the election, have seen a shift in party control in 7 of the 8 years for an 88% success rate. 
So if looks like the president will not be reelected expect the S&P 500 to be down from the end of July to the end of October, but to rally to yearend. For now, remain cautious, stay on the defense, hold winners, sell losers and be ready for the summer doldrums and then a yearend rally.
Pulse of the Market
Fueled by strong expectations of a quick economic reopening and a wildly much better than anticipated May jobs report, DJIA surged higher in early June to briefly trade back above its 200-day moving average (1) and 27,000. However, when DJIA was surging higher in early June new covid-19 cases were also beginning to jump higher. The spike in cases is problematic and sufficient to briskly knock DJIA lower. 
DJIA’s recent declines and shift in momentum has been confirmed by both the faster and slower MACD indicators turning negative (2). Weakness this week has keep the trend of the MACD indicators negative. Historically MACD generates the best buy signals when a positive crossover occurs below the zero line. Should such a crossover occur soon, it could be an indication that NASDAQ’s summer rally is underway. 
Dow Jones Industrials & MACD Chart
At the start of this week DJIA (3), S&P 500 (4) and NASDAQ (5) all recorded gains in four of the last five weeks (and five of the last seven). Going forward sustained gains like these are not as likely as valuations are stretched and the near-term outlook is becoming increasingly muddled by spiking covid-19 cases.
Market breadth measured by NYSE Weekly Advancers and NYSE Weekly Decliners (6) has tracked weekly performance with Advancers outnumbering Decliners in positive weeks. Last week the number of Advancers did decline compared to previous weeks where the market recorded gains. That could be an indication that the broad recovery rally since the March low has or is nearing its end. 
Weekly New Highs have picked up (7) but appear to be stalling as only NASDAQ has been able to fully recover and break out to new all-time highs. Absent a prolonged retreat, Weekly New Lows have remained subdued. Recent relatively stable readings are worth monitoring closely as an expansion of New Lows or New Highs could aid in confirming the markets next direction. More Lows could point to a move lower while more Highs could suggest a move higher for the major indexes.
Less volatility in the 90-day and 30-year Treasury rates is encouraging (8). The 90-day rate is not likely to make any major moves as the Fed has signaled and confirmed repeatedly that it will keep rates low and take whatever action is needed to support the economy and smooth operation of financial and credit markets. The 30-year Treasury rate is also not likely to make any major moves unless there is a major change in the longer-term economic outlook.
Click for larger graphic…
Pulse of the Market Table