Weekly Stock Market Forecast: Seasonality Signals a Sell Off


Weekly Stock Market Forecast: Seasonality Signals a Sell Off

 

Last Week at a Glance

The equity market started the week on record highs on Monday.

Turnaround Tuesday saw an early US session sell-off, trapping some new shorts near the lows.

Wednesday was the big short squeeze event.  Thursday we saw some volatility but markets held their ground, and gave back some ground on Friday to end the week on an options expiry day.

The key take away was that 4 out of the 5 days, the high volume in the market occurred on the sell side.

Despite being at record highs, summer markets are seeing very little volume go through.

This will eventually lead to trouble, but we do not recommend shorting big until the time is right.

One of my favorite sayings is that “the market can stay irrational longer than you or I can remain solvent”.

So don’t fight the bull – make it pay you.

 

 

Meanwhile, oil prices collapsed on Friday after seeing some upside all week.  Bond prices and gold soared higher, which is interesting to see in light of strong bullish prices.  This can be a warning sign in the medium term.

The weakest asset of the week was by far the US dollar, dropping 1.26%.  This was on the strength of the Euro currency as the European Central Bank’s hawkish tone sent the currency higher during the press conference.

Most major currencies finished the week stronger against the US dollar.

The VIX index, which measure volatility collapsed into historic lows inside of the 9 handle.

 

Here is a closer look at the main asset classes:

 

FANG Stocks Roar Back on NFLX Strength

Netflix earnings were a double edged sword.  On one side subscriber growth exploded versus expectations, but the expenses to produce and obtain content grew astronomically.  The story was growth, but at the expense of cash burn.

None the less, Netflix popped over 17% last week, pulling the entire FAANG index back to highs.  You can see NFLX outperform all other FAANG stocks in the top right chart. It is the red line.

 

FAANG Stock Earnings This Week!

We have a heavy schedule of earnings this week in the stock market, but most notably:

  • Google – July 24th
  • Facebook – July 26th
  • Amazon – July 26th

Each one of these company earnings can unleash big volatility in the markets this week.

This is a great week to be a day trader, and can be tough for swing traders.

Economic Calendar & Federal Reserve Meeting this Week

This week has some major economic announcements in the US, in comparison to the past few weeks which have been quiet.

Tuesday we see the Consumer Confidence numbers.

Wednesday is all about the Fed.  While it is very unlikely to see a rate hike this meeting, traders are looking for answers to some pretty big questions.

What will be the future outlook?  Is the rate hike cycle done for the year? What about next year? Any updates to the balance sheet?

Thursday we see the usual unemployment claims.

Friday is the all important Advance GDP q/q number, which is a strong leading indicator and something traders pay very close attention to in attempt to forecast economic health.

 

 

This upcoming week will be chaotic.

Earnings, Fed, and some major levels are being tested.

 

What Does Stock Market Seasonality Think?

If you are unsure of how stock market seasonality works, click here to read more.

Here is an SP500 seasonality chart:

You can see that July is the last month of upside in seasonal analysis, based on 50+ years of combined data.

While seasonality does not mean it will drop for sure, you have to pay attention to it and respect the length of data it represents.

You can see the next two months, August and September, are the only two overall negative months.

This is the last full week of July, then we slide into weak seasonality.

Be warned. Be careful. But trade with momentum, not against it.

 

Good luck this week.

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