August Outlook: Bull’s Rest Sets Up August Rally But More Volatility Expected
Seasonal: Neutral. August is the worst month for the DOW and second worst for the S&P 500, NASDAQ, Russell 1000, and Russell 2000 over the last 36 years, from 1988-2023, but in election years August has been stronger.
Fundamental: Soft. The recently released advance estimate of Q2 GDP did accelerate to 2.8% with a pickup in consumer spending and inventories, but also a downturn in residential investment. Inflation is slowly cooling but is still stubbornly above the Fed’s stated 2% target. Corporate earnings have been mixed and AI investment is eating into bottom line profits. Unemployment continues to tick higher and at 4.1% is at its highest level since December 2021.
Technical: In retreat. After surging to new highs in the first half of July, the DOW, S&P 500 and NASDAQ have come under pressure. What began as a rotation out of tech and into anything else, especially small caps and the Russell 2000, has manifested into a pullback from recent highs ranging from –3.3% by the DOW to –7.9% for NASDAQ. The 3 major indexes are at or below their respective 50-day moving averages. The Russell 2000 continues to hold onto most of its recent gains. Levels to watch are DOW 39000, S&P 5390/5265, and NASDAQ 17000/16500.
Monetary: 5.25 – 5.50%. The FOMC met this week and as expected kept interest rates unchanged. The odds of a September rate cut are near 100%. The only unknown is by how much. Will it be .25% or .50%? It is hard to see how much, if any, boost a 0.25% reduction in interest rates will produce in the economy. It is also challenging to see an aggressive rate cut cycle while inflation is still stubbornly above the Fed’s 2% stated target.
Sentiment: Euphoric. According to Investor’s Intelligence Advisors Sentiment survey Bullish advisors stand at 64.2%. Correction advisors are at 20.9% while Bearish advisors numbered just 14.9% as of their July 24 release. The spread between bulls and bears now exceeds what it was in March. A cautious stance is warranted at this time as better opportunities may be had later this year.
Biden out. Other than the biggest one-day drop since 2022, the biggest news lately has been that President Biden has dropped out of the race, leaving former President Trump running against current Vice President Harris for president this November. For a moment there was a chance for an open democratic convention, but after President Biden endorsed Kamala Harris most other potential candidates and party bigwigs followed suit. Ms. Harris is the presumptive Democratic Party nominee for president this year. All that remains is what appears to be a rubberstamp vote by the delegates.
After struggling for the better part of the past four years the small caps have rallied sharply this month. All year long the Russell 2000 languished, oscillating between positive and negative until jumping higher over five trading days from July 10-16. Clearly the small caps are rallying on the long-awaited beginning of the Fed easing cycle which will likely begin at their September meeting. The notoriously weak second half of July is delivering the mean reversion correction I wrote about last month. How far it goes remains to be seen. Both the S&P and NASDAQ touched near term support at S&P 5390 and NASDAQ 17000. If these levels fail to hold it looks like the March intraday highs around S&P 5265 and NASDAQ 16500 are the next near-term levels of support. This equates to a 7.1% correction for S&P and 11.5% for NASDAQ. Keep your eyes on these levels.
Despite all the upheaval in the political arena and the tech selloff, the bull market is still intact. Election year forces have been boosted by the AI-Tech Boom and the economic soft-landing scenario all year long. After this rally respite and the usual August-October volatility, I expect the bull to hit new highs near yearend. My bullish election forecast remains on track, but I do expect some volatility over the next few months, both upside and downside. So, strap in as this unique election year evolves. My strategy has us positioned well. Stick to the system and be patient. I expect a better buying opportunity later in Q3 or October just ahead of the election.
*Source: The Stock Trader’s Almanac
If you would like to discuss anything further do not hesitate to call or email me to schedule a phone or personal appointment. As always, referrals are greatly appreciated.
All the Best
Mark
Innovative Investment Management
864-551-2776
678-362-0730
mark@innovativeinvestmentmanagement.com
mark@ininmgt.com
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