Most good movies or books have a villain of some sort. The character that you root against, but also respect because it adds a certain excitement to the story.
For the last two weeks I’ve been warning that the seasonal backdrop of the market is weak. Weak is actually a nice way to put it.
According to both weekly and monthly seasonality trends, the span between August and September are lean for returns. Scratch that, they’re just plain bad.
We just got into week 30 for the market, identified with the callout in the chart below.
So, the “Dog Days of August” are almost upon us. Historically this is the time of year when volume dries up and prices go down. Literally. But its not that easy.
The problem with seasonality is that it needs a “trigger”. We need a villain. You know, something to blame the seasonality on.
Think about it, the most popular seasonal trend to talk about is “Sell in May and go away”, but how well does that work? It’s about a 50/50 proposition. Unless there’s a reason for it to work.
Historically, that seasonal trend doesn’t work well, unless there’s a trigger. Bad earnings, the market is already in a bear market trend, you get the idea.
The Magnificent Seven have been limping through July. The reason is simple, it’s a small bubble.
Earnings reports over the last two weeks have been hinting that we’re not seeing the bottom-line growth that AI has been promising. It’s coming, but investors are getting impatient.
The impatience is coming at a bad time as we head into that August seasonality that almost always brings the market down.
For the first time since April, the Nasdaq 100 is trading well below its 50-day moving average, telling you that the trend may not be our friend.
Look at the market’s “Golden Child”, NVIDIA (NVDA).
I commented on the stock a few weeks ago as it fell to its 20-day moving average and what had been strong price support of $120. Both of those support levels have given way to even more critical support for the stock’s 50-day moving average.
To add even more drama to the situation, that 20-day trendline – which is a barometer of how the “traders” view the stock – has turned bearish.
The same has happened with Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), and Meta (META).
The earnings season hits its peak next week with more than 35% of the S&P 500 companies reporting their quarterly results.
Included in the earnings parade are Meta, Microsoft, Apple, and Amazon. That crescendo in earnings should serve as the last “push” for stocks to try moving higher just as we get into the beginning of the seasonally troubled August trade.
Volatility, according to the market’s “fear gauge” is on the rise. The “VIX” is hovering at its highest levels since April, telling us that investors are already nervous. ANY, and I mean A-N-Y uncertainty in next week’s earnings will trigger a self-fulfilling selloff to time up perfectly with August’s seasonality.
From there, investors will start hitting the sell button right through to September when markets typically see their worst performance of the year.
Prepare a list of those stocks poised for support from their intermediate-term technical trends.
For example, I own shares of Microsoft and Palantir (PLTR) and would like to add to these Artificial Intelligence Names. They’re on my “Target List”.
Also on the list are several small cap stocks and the Russell 2000 Index ETF (IWM). This is going to be one of the hottest areas of the market as we head into the end of the year.
I’ll name individual stocks for you in the small cap universe next week.
Progressive Insurance (PGR) has the “Name Your Price Tool”, you need something similar. In my case, it’s the use of a stock’s technical patterns. Again, we’re not day trading here, so I’m using the 200-day moving average as my first tool to “name my price”.
Here’s the chart of Microsoft along with its 200-day moving average. That trendline aligns perfectly with the $400 price, which is where I set my “target” to buy the long-term dip in this AI leader.
In Amazon’s case the same approach gives me a target of $165, an 8% drop from today’s price.
Most often an Investor’s biggest mistake – both professional and individual – is moving too quickly.
Remember, every trend has noise, and all noise forms a trend. By using the trendlines and seasonality trends I’ve talked about today you will reduce the feeling of urgency to jump into a stock as a knee jerk reaction.
I’ll be back with you Monday to name names and prices right off my newly updated small cap watchlist.
Until then, I wish you the best trading success.
