The stock market will probably sell-off in early July


The tech sector has led the stock market’s rally over the past few months. Within the tech sector, big tech stocks like Facebook, Amazon, Google, Apple, Netflix (FAANG) have soared.
As a result, the NASDAQ 100 remained above its 50 daily moving average for 138 consecutive trading days. This streak just ended, with the NASDAQ 100 falling below its 50 day moving average yesterday.

Here’s the historical study.

When the NASDAQ 100 fell below its 50 day moving average for the first time in more than 100 days, the NASDAQ and S&P 500 always experienced short term weakness.

Here are all the historical cases. We pay particular attention to the S&P because we only invest/trade the S&P’s ETFs.
*All charts are the S&P 500’s charts.

March 10, 2011

This occurred in the middle of the S&P’s 7% small correction. After this date, the S&P fell another 3.4% and the NASDAQ 100 fell another 3.8%. The NASDAQ fell more than the S&P.

April 3, 2000

This case is not relevant to us today. This was a bear market case, and our medium-long term model states that the S&P is still in a bull market right now.
The S&P cratered for 2 weeks after April 3 2000.

February 21, 1997

This signal came out during the very beginning of the S&P’s 10.2% small correction. The S&P fell another 8.3% after this date while the NASDAQ fell another 8.9%. As you can see, the NASDAQ fell more than the S&P.

September 27, 1995

The S&P did not make a small correction in this case. It merely consolidated for another month before soaring throughout the rest of 1995. 1995 threw a lot of historical patterns out the window.

May 14, 1991

This signal came out 1 day before the S&P completed its 6.4% small correction. Clearly this case does not apply to today, because the S&P isn’t even close to falling 6%.

July 7, 1986

This signal came out at the beginning of the S&P’s 8.4% small correction. The S&P fell another 4.1% while the NASDAQ fell another 7.7%. As you can see, the NASDAQ fell much more than the S&P.

Bottom line

  1. 5 of these 6 cases existed within a small correction.
  2. 1 of these 6 cases (1995) resulted in a 1 month consolidation for the S&P before the S&P continued to rally.

Based on this historical analogue, we can see that the S&P will see some weakness in the next 3 weeks. The S&P will either go down or be flat, but it will not go up.
Perhaps this is the 6%+ small correction that we’ve been looking for. Or perhaps this will be like 1995 in which the S&P consolidated for a few weeks. Either way, we will know within the next 3 weeks.
If the S&P makes a small correction right now, that’s a perfect setup for a rally on Q2 2017’s earnings season. Banks will start reporting in mid-July, and tech companies will start reporting in late-July. With tech stocks leading the decline right now, their earnings season will be perfect bullish reversal triggers.
Q2 2017 earnings season will probably be strong.
Yes, it’s true that July seasonality is bullish. But seasonality doesn’t always work. It’s merely an AVERAGE of the S&P’s performance in July.

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