August Outlook: Frothy Sentiment & Seasonals Suggest Correction
By: Jeffrey A. Hirsch & Christopher Mistal
July 27, 2023
Let’s preface this month’s outlook by reiterating our bullish stance for pre-election year 2023. Our best-case scenario forecast from the December 2022 issue for “Above average pre-election-year gains of 15-20%,” is clearly in play again. At yesterday’s highs, the Dow was up 7.2% year-to-date and S&P 500 was up 18.9%. Tech stocks hit their highs last week with the NASDAQ Composite up 37.2% and the NASDAQ 100 up 44.8% YTD!
Many of you may remember back in early 2023 during one of our members-only webinars, after the market hit our bullish January Indicator Trifecta when we first leaned toward the best case scenario, that our biggest concern was that we were not bullish enough. We remain bullish for 2023 but we do expect the market to pullback here and correct 5-10% or so over the next three months, August–October, before heading toward new highs again in Q4.
As we stand on the threshold of the worst two months of the year, August and September, the bullish market wave may be breaking. Our favorite sentiment indicator is at rather frothy levels associated with pullbacks and corrections. In this week’s Investors Intelligence US Advisor Sentiment Report, bulls increased to 55.6%, the highest level since November 2021 when they hit 57.2%. Bears ticked up as well to 19.4% from 18.0% the week before, which was the fewest bear count since early in January 2022. This meant there were fewer advisors in the correction camp, the fewest since the start of this year. 
The venerable John Gray, longtime editor of Investors Intelligence, noted that, “As contrarians, we note the market rarely fulfills expectations, so the contraction in their [correction] numbers may mean the chances for a short-term market setback is increasing.” (Full disclosure we are one of the “correction” advisors in the survey.)
In his Late Morning Update today our friend and legendary market analyst, Art Cashin, Director of Floor Operations for UBS at the NYSE warned, “Keep an eye on yields. They are starting to inch up and I am a little anxious that the VIX dipped back below 13. The sentiment indicators are on the verge of going parabolic to the over-enthusiastic side.” 
At this writing on Thursday afternoon, the market has reversed course, breaking the Dow’s vaunted 13-day winning streak, as the 10-year yield poked above 4% driven by hawkish rhetoric from the Fed at yesterday’s FOMC meeting and the better-than-expected GDP reading of 2.4% that came out today. You may also remember the concern we conveyed about a rise in the 10-Year Treasury Yield back in the March member’s webinar. Clearly the uptick in the 10-year has spooked the stock market. Perhaps this is the beginning of a summer correction. 
NASDAQ’s parabolic rally the past two months has created a weakly supported cantilevered shape. In our trusty seasonal pattern chart below. It’s uncanny how NASDAQ continues to track these historical trends and appears to have made a short-term top right on cue at the typical mid-July point. We would not be surprised if the market tracked the more dramatic corrections in the blue pre-election year line with an early August low, a late September pullback and then a final selloff near the end of October.
[NASDAQ Pre-Election Year Seasonal Chart]
The market is clearly primed for a summer correction. In the next chart below of NASDAQ with our recent June 23 Seasonal MACD Sell Signal highlighted the monthly pivot points show the market struggling at red-dotted line monthly pivot point resistance. A correction from the recent high of 14358 to the green-dotted monthly pivot point support of 13173 would be an 8.3% correction. 
[NASDAQ MACD Pivot Point]
So, let’s try to ride this breaking bullish wave into the summer doldrums and then paddle out again at the beginning of the Best Six Months for the next bullish set that should carry the market well into election year 2024.
Pulse of the Market
It took more than six months, but DJIA has finally broken out above its old recovery closing high from last November (1). The breakout has been accomplished in near record-tying fashion as DJIA attempted to extend its daily winning streak to 14 days today. A winning streak that has existed since June 1897 (this is not a typo). Ultimately, DJIA’s streak did end today at 13 days. That ties it with the second longest streak of 13 straight days back in January 1987.
DJIA’s new life has begun pulling its 50- and 200-day moving averages bullishly higher. Both the faster and slower moving MACD indicators are also bullish and trending higher (2). But much of the recent action is eerily reminiscent of last year’s summer rally that eventually gave way as 10- and 30-year Treasury bond yields began climbing toward 4%.
Dow Jones Industrials & MACD Chart
June’s pair of Down Friday/Down Monday (DF/DM) occurrences (3) set the stage for typical week after quarterly options expiration weakness and NASDAQ’s Midyear Rally. As is often the situation, DJIA (4) and S&P 500 (5) also participated in the rally with gains in three of the last four full weeks. However, NASDAQ (6) did weaken just after mid-July. As of today, July 27, NASDAQ is holding onto a modest weekly gain, but could easily slip further and record a second straight weekly loss. If this were to transpire, it would be the first time this year that NASDAQ declined in two straight weeks.
Over the last four weeks, market breadth was mostly in line with weekly moves. Weekly Advancers solidly outnumbered Weekly Decliners in positive weeks and vice versa in negative weeks. Last week’s NASDAQ decline was the exception and potentially an early indication of brewing trouble (7). A mixed reading this week will add to concerns going forward.
Once again Weekly New Highs (8) have failed to exceed their recovery peak of 356 during the week ending February 3, 2023, even as DJIA, S&P 500 and NASDAQ climbed to new 2023 highs in July and beyond. Weekly New Lows did taper off over the past four weeks but are also greater in number now than they then in February. The market is enjoying a nice bull market summer rally, but the rally is also beginning to show signs of cooling.
After briefly leveling out in June, yields (9) resumed climbing higher in July in advance of this week’s Fed rate increase. The swift rise of the 90-day Treasury yield is the result of the Fed, while the 30-year Treasury is nearing 4%. As longer-dated yields climb, pressure could mount on the banks that are holding too many of them in anticipation of a recession that does not appear to be arriving anytime soon.
Pulse of the Market Table