Liquidity is still abundant, and pre-election year seasonals are supportive; buy the dip?
Late summer dips, particularly in election years, have been historically shallow.
Liquidity is still abundant, and pre-election year seasonals are supportive; buy the dip?
Late summer dips, particularly in election years, have been historically shallow. According to our friends at the Stock Trader's Almanac, full-month July gains in excess of 3% (this July picked up 3.3%) have historically been followed by declines of just under 7% on average or a median of just under 5% (stats are based on the Dow Jones Industrial Average). The current correction based on E-mini S&P 500 futures has been roughly 5% and about 3% in the Dow. In the big picture, these corrections fall into the drop-in-the-bucket category, but that's par for the course during this time of year. Further, the Fed has pulled out all the stops and still hasn't been able to slow down the freight train loaded with liquidity injected into the economy in 2020. While they have sucked some of the froth out of the system, the M2 money supply is still well above levels seen before 2020, and we think this keeps the train on track for now. Thus, we suspect the path of least resistance for the major indices will be higher in the coming weeks. Here are some of our thoughts on this.
COT Report
We have pointed out the massive bearish short position in the futures markets for months. According to the Commitments of Traders Report (COT) issued by the CFTC (Commodity Futures Trading Commission), the historically significant net short position has been largely unwound, but speculators are still short the market; the longer equities hold up, the more likely short speculators are to cover their positions (creating motivated buyers).
There are also reports of under allocation to equities in many portfolios and the accumulation of sidelined cash. Given the overwhelmingly bearish narrative on business news, we would guess investors are hoping for a larger dip to employ the capital. However, when the majority are looking for something to happen, the markets deliver the opposite.
Seasonality
Summer swoons have historically been relatively shallow. According to the 15-year stats compiled by MRCI, dips are most likely to find support in the third week of August before rallying through most of September. In the larger picture, we generally see a strong end to the year; this is particularly true of pre-election years.
Daily Chart
The E-mini S&P 500 broke out of its daily trading range in mid-June and retested that same trading range in late June. As is often the case, the previous area of resistance became support; that particular support sparked a rally that carried the index to the mid-4600s. The current index decline is forcing a second retest of the breakout trendline. Coincidentally, the 70-day simple moving average lies on the trendline (we find this to be more helpful in holding trends than the more talked about 50-day moving average). If seasonality and our thesis of excessive liquidity in the system holds true, it should offer enough support to fend off the bears, at least for now. Standard back-and-fill trading would likely test the 20-day moving average near 4500, but a close above that should pave the way for a little over 4700.
*There is substantial risk of loss in trading futures and options. There are no guarantees in speculation; most people lose money trading commodities. Past performance is not indicative of future results.
*Seasonality is already factored into current prices, any references to such does not indicate future market action.
**There is substantial risk of loss in trading futures and options.** These recommendations are a solicitation for entering into derivatives transactions. All known news and events have already been factored into the price of the underlying derivatives discussed. From time to time persons affiliated with Zaner, or its associated companies, may have positions in recommended and other derivatives. Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction. Seasonal tendencies are a composite of some of the more consistent commodity futures seasonals that have occurred over the past 15 or more years. There are usually underlying, fundamental circumstances that occur annually that tend to cause the futures markets to react in similar directional manner during a certain calendar year. While seasonal trends may potentially impact supply and demand in certain commodities, seasonal aspects of supply and demand have been factored into futures & options market pricing. Even if a seasonal tendency occurs in the future, it may not result in a profitable transaction as fees and the timing of the entry and liquidation may impact on the results. No representation is being made that any account has in the past, or will in the future, achieve profits using these recommendations. No representation is being made that price patterns will recur in the future.