*These are our short term thoughts on the market. We combine our medium-long term model and discretionary outlook when making investment decisions. We’re looking at how the market reacts to news, earnings, and other fundamental themes related to the key individual sectors.
Go to our homepage for our latest market outlook.
Stock index & news
July is seasonally strong
The S&P 500 is seasonally weak in late-June. Let’s take a look ahead at July. We don’t use seasonality when making investment decisions because seasonality doesn’t provide us with a massive edge. However, seasonality is a small factor that we consider in our discretionary market outlook.
Historically, July has been the S&P’s strongest month from May to September. This is partially because earnings season takes place from mid-late July. The S&P doesn’t always go up when earnings season is strong – sometimes the S&P falls a little on strong earnings. But overall, the S&P is more likely to go up than down on a strong earnings season.
Here’s another interesting pattern. Months that include earnings season (i.e. January, April, July, October) tend to be good months for the S&P. This is because companies usually issue negative earnings guidance. “Analysts” play along and lower their earnings estimates so that come earnings season, the companies easily beat “expectations”.
We already said that Q2 2017 earnings season (in July) will probably be strong. Based on the few major earnings that have already been released, it seems that our prediction will be correct.
- Oracle handily beat earnings expectations, and its stock popped on the news.
- Adobe beat earnings expectations, and its stock also soared on the news.
- Fedex beat earnings expectations, and its stock price also jumped. Due to the nature of Fedex’s business (a shipping company), some investors consider Fedex to be a bellweather for the U.S. economy.
*Tech earnings are expected to be the main driver for earnings growth in Q2 2017. Despite relatively high expectations, it seems that the tech sector can still handily beat expectations.
The short term bearish pattern has been broken
In Tuesday’s market summary, we explained that since 1999, the S&P in the week after June Opex (i.e. this week) has always closed lower than the previous week.
We warned that these “high probability” short term patterns work well until they don’t. These patterns are meaningless, and can be broken in a heartbeat. Well this “perfect” historical short term pattern has just been broken.
The S&P closed at 2433 last Friday. It closed at 2438 today. The S&P’s close today is not lower than last Friday’s close.
- Our model says that this is a big rally in a bull market. There is no significant correction on the horizon.
- Despite our model’s bullishness, we’re sitting on 100% cash. By the end of June 2017, the current “small rally” will be longer than 96% of all historical small rallies.
- We’re waiting for the next 6%+ small correction. Then we’ll shift into 100% long UPRO (3x S&P 500 ETF).
Click below to find out our model’s value right now as of June 23, 2017. If you don’t have social media, feel free to contact us and we’ll email you with our model’s value.
Our model’s value is 39 as of June 23, 2017. Last week the model’s value was 35. This was a rather big jump in the model’s value. The model is updated daily. We post the model’s value here once every week.
The energy sector outperformed the S&P today because oil went up. Oil’s bounce today was to be expected. In the past 8 weeks, oil has always gone up on a Friday.
Here’s XLE (energy ETF).
Here’s WTI oil.
The financial sector fell and underperformed the S&P today because interest rates fell. There is a small positive intraday correlation between interest rates and the U.S. dollar rate now. This correlation is on and off.
Here’s XLF (finance ETF).
Here’s the 10 year Treasury yield.
Here’s the US Dollar Index.
The tech sector outperformed today. There’s nothing abnormal about this. Tech tends to outperform the S&P as long as it’s still a bull market.