Summer Seasonality
Premium Section: Hot Summer Sectors
June 20th was Summer Solstice and it’s time to turn our attention to Summer Trading! Here is what we can expect:
Summer trading is known for low volume and low breadth, thus index and sector ETFs may be safer bets than individual stocks (especially if the McClellan Oscillator confirms low breadth).
The Summer rally is weaker than the Autumn, Winter or Spring rallies.
July is the best month of the quarter as funds that rebalance quarterly will employ capital in July.
The index can go higher on low volume.
There is usually a correction that occurs in late Summer.
Try not to take Summer trading too seriously as the real moves occur after Labor Day when Wall Street returns from their vacations in the Hamptons. Go enjoy the Summer!
The basic 20-year seasonality for the S&P 500 (SPY) looks like this (courtesy of Equityclock):
The Stock Trader’s Almanac goes a little bit more in-depth and looks at historic statistics under different election scenarios. The two most applicable to us now are the “Sitting President Running” and “Down April - Up May” scenarios.
Sitting President Running Scenario (Green): This scenario points to a pop in late June/early July for the Independence Day rally, followed by some chop and a late July to mid-August rally. After a some volatility, there is strength going into mid-September
Down April - Up May Scenario: There is minimal volatility but a lot of chop all Summer. However a mid-August top sets up for a sizble drop into late October.
As all historical analogs are never perfect, I believe that we could have a low-breadth rally followed by a sizable drop. The low breadth rally could be driven by Smart Money employing capital on every dip.
Meanwhile fear of a market top appears to be taking a hold of peoples’ minds.
With heavy retail put buying occurring, it’s unlikely that the market makers will allow them to make money en masse. When retail places bearish option bets, the market usually goes up to wash out the retail puts — before they allow the market to go down.
S&P 500 Breadth is weak as the market declines, however it is not terrible. It’s more like a sideways non-factor/nothing burger.
Nasdaq 100 breadth is actually up slightly, even as the S&P 500 and Nasdaq 100 fell last week. This is not the sign of a typical sell-everything waterfall decline.
The combination of Smart Money buying and stagnant breadth makes us believe that another low-breadth Summer rally could be setting up. Typical.
The increase of Fear and retail put option buying lead us to believe that the market will not go down significantly, until the puts have been washed out and Market Makers position themselves to profit from the drop and not retail. A 4-Year Cycle peak and decline is expected between now to November 2024 and these typically bring average declines of 19%. There are higher odds of this occurring after the Summer rally, when retail is positioned bullish again.
Market Conditions
The S&P 500 (SPY) increased 0.32% last week, but declined 1.18% on Thursday and Friday.The change of complexion is occurring just as the cycle bracket renews. Currently RSI is overbought and this condition has to be corrected before upward movement is likely again. A move back down to the 50 mark and a reversal of direction on the RSI would make for a good buy signal. The MACD indicator shows waning bullish momentum, but is still above 0 making it still supportive.
It’s important to notice that breadth is negative but not terrible. The McClellan Oscillator is negative, but appears to be increasing slightly, despite the SPY declining over the past two trading days. The market also has Net New Lows, which is a warning to stock-pickers for the moment. However there are not that many Net New Lows.
It’s also important to note that the SPY had 4 Distribution Days over the past 4 weeks. Typically 4 to 6 Distribution Days occur within 4 to 5 weeks before a reversal. We may be due for some more corrective action before the Summer rally. Perhaps a trip to the lower channel line and 30 SMA around $532 happens. That would also be a break of the 21 EMA, which may be followed by a snap-back above the 21 EMA. We’ll have to keep our eyes open next week.
In conclusion, markets could go through more corrective action over the next week or so. There could be a Summer rally, however a 4-Year Cycle top and decline is looming in the background and can occur anytime from now to November. Now is the time to be ready to take capital protection measures, even if the uptrend continues.
In the Premium Section we’ll go over sectors that typically do well over the Summer months.
Our Q3 2024 Cycle Forecasts for Indexes, Sectors, Cryptos, Commodities and the Magnificent 7 will be available Wednesday 6/26 here: https://cyclesedge.com/
Disclaimer - All materials, information, and ideas from Cycles Edge are for educational purposes only and should not be considered Financial Advice. This blog may document actions done by the owners/writers of this blog, thus it should be assumed that positions are likely taken. If this is an issue, please discontinue reading. Cycles Edge takes no responsibility for possible losses, as markets can be volatile and unpredictable, leading to constantly changing opinions or forecasts.