The stock markets have rallied strong in the first half of July.
Until Monday, most stock indexes were up by 3% from the beginning of this month, and up 8% from the panic lows of “Brexit”.
Investor sentiment has turned extremely optimistic… The financial talking heads are bullish… And financial analysts are now throwing caution to the wind.
But one chart is giving us a major warning about the second half of July…
Take a look.
The above chart shows the “seasonality” of the S&P 500 – in other words, how stocks perform in different months or periods of the year.
The black line shows the “overall” seasonality of the stock market. But the lines we want to pay attention to are the blue and purple lines because they show how the stock market performs during an election year.
What seems to be evidently clear from the chart is this:
During a US election year (which is the year we are in right now), the S&P 500 has a positive performance in the FIRST half of July, but negative performance in the SECOND half of July.
This seasonality chart has been correct about the first half of July this year. As I mentioned, from July 1st to July 15th, stock markets have performed about +3% on average.
If history and seasonality repeats, then we should see a fall in stock prices in the second half of this month.
It’s important to note that I’m not bearish on the stock market. I am NOT predicting a crash or a major correction in stocks. This is NOT what the seasonality chart is telling us.
In fact, since 1900, the stock markets have NEVER formed a 12-month top in the month of July!
My only concern is that seasonality is telling us that there’s likely a pullback or retracement coming for the stock market in the short term.
The long term trend of the stock market for 2016 still remains bullish as I explained last week. So this pullback in the second half of this month is actually a buy opportunity in my view.
But we do need to be careful as to how we position ourselves in order to trade the next market move.
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