The Bulls Reign, but Let's Prepare for the Bears

Even a so-so start to earnings season hasn't fazed the bulls in what has been a pretty ho-hum week for the market.

Sure, there has been some geopolitical action as the NATO summit, presidential visit to the United Kingdom, and Helsinki summits dominated headlines, but the bluster from across the pond only served to take the focus off tariffs and trade wars, which had been churning stock prices.

Still, the bulls are in control right now - which means this is the perfect time to find out why - and look at when those bears might finally gain the upper hand.

That way, we'll be properly positioned to make some money when they do...

There's Precedent for a Bullish July

Over the last 20 years, seasonality has favored the bulls this month.

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The S&P 500 posts positive returns 55% of the time and averages a 0.6% gain. Better yet, the Nasdaq-100 fares even better, moving higher 65% of the time and averaging a 1.2% increase. While those are impressive averages, July has been especially bullish this year.

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The major indexes have moved steadily and impressively higher - almost in unison. In fact, the Dow Jones Industrial Average, S&P 500, and Russell 2000 have each gained about 3.4% since the end of June. And the Nasdaq Composite continues to outperform its brethren, hitting another record high on Tuesday (despite Netflix Inc.'s [Nasdaq: NFLX] struggles).

On the charts, all the major indexes are sitting well above their rising 50-day moving averages. This helped the S&P 500 take out potential triple-top resistance in the 2,790 to 2,800 region as it builds on a pattern of higher highs and lows since its April bottom.

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Even as the Nasdaq and Russell 2000 continue to push all-time highs, the Dow and S&P 500 have been able to keep pace, but that doesn't mean the risk-on trade has lost steam. After all, tech and small-cap indexes show no signs of easing off the gas.

So, as I've said, there's no cause for concern until we see tech and small-cap stocks start to lag.

Right now, all signs favor the bulls, but I'm going to put a note of caution on the record here, because August isn't a seasonally strong month, and the risk-on trade won't last forever...

Here's the Case for the Bear Run

The CBOE Volatility Index - though dipping - is having trouble breaking into the single digits. And the August-to-December period has been historically bearish for stocks.

That's why we'll play both sides of the market moving forward by adding both calls and puts to the portfolio as companies continue to report earnings. With post-earnings plays - like the Netflix buy I gave you earlier this week - we can avoid a level of uncertainty surrounding stocks.

Believe it: I'm watching for signs of a real downturn, and when it happens, I'll be in touch to flip the script on my Best in Breed analysis and find us some "short-side" winners.

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About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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