The First Ingredient to July's Rally

To say that it feels like the market feels like it has been here before would be an understatement.

Stocks are rolling into early July with a full head of steam as the market is coming off a strong first half of the year.

For the first six months, the S&P 500 gained 15.9% while the Nasdaq added 31.7% in value for the same period.  That performance for the Nasdaq registers the best first-half performance in 40 years.

Of course, we know where the core performance of the market has come from, large-cap technology and Artificial Intelligence (AI).  Investor's 'Fear of Missing Out' emotions over AI have overridden all risk measures, resulting in a narrow rally that has lifted all the boats in the harbor.  

We'll pay for the wild AI valuations later in the second half, but for now, there's some unfinished business to the upside as we head into earnings season.

The "timeline" that this market is preparing to work its way through will play a heavy hand in two 10-15% moves for the Nasdaq 100.  One higher, then, one lower. 

I'm talking about the bullish one-two punch of the Q2 earnings season.

The first ingredient to July's strength, Seasonality.

July boasts one of the healthiest seasonality trends for the S&P 500.

Over the last 20 years, the month of July has generated average returns of 2.3%.  Those average returns rank July as the most profitable month of the year.

Drilling down a bit further, July ranks number four for win/loss percentages at 70%.  April is the most consistently winning month at 80%, though its average returns are slightly lower at 2.0 percent.

The Nasdaq 100 - the index at the core of this year's market gains - shows similar, but stronger gains for the month of July over the last 20 years.

As expected, the technology-heavy index outpaces the strong S&P 500 gains by turning in an average return of 3.3% for the month of July.

This is also the Nasdaq 100's most consistently winning month of the year with a win/loss ratio of 85% over the last 20 years.

To say that the market should experience a strong tailwind over the next three weeks is an understatement.  

But the power of July's seasonality can be driven down to one catalyst, earnings.  This earnings season is likely to be no different this time around, but it has a catch.

The second quarter earnings season will kick off in one week with some of the largest banks in the world. revealing the results of their operations for the last three months.

The reports will come at a time when many investors are still feeling anxious about the financial system following the failure of three regional banks in March.  We're used to seeing a "buy the rumor rally" in the financials two to three weeks ahead of the earnings kickoff.  So far to date, that's not materialized, even after all banks passed the Fed's latest Stress Test.

The reason is simple, as bullish as investors have become, they're still not comfortable enough to get close to the "third rail" of the stock market, the financials. 

I'm going to cover that in more detail on Monday, complete with a strategy for the upcoming earnings season.  For now, let's focus on the general overview and a few stocks in tomorrow's report! 

The post The First Ingredient to July's Rally appeared first on Penny Hawk.

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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