SPX and QQQ look to be trying to stabilize after pulling back to support and showing a strong initial push off the lows into mid-day Thursday. Economic data came in stronger than expected on Thursday, which might make the FOMC’s job a bit tougher, but likely takes a July surprise rate cut off the table. Sentiment has worsened in recent weeks, though trends have not shown ample deterioration to expect much further selling pressure. Moreover, July seasonality (which has proven quite accurate thus far) shows that a bottom and rally back to new highs is quite likely during the final week of July. To reiterate yesterday’s message, DJIA, RSP, SPX are very close to support, and a market bottom should likely happen between Friday 7/26 and Monday 7/29 before pushing back to new all-time highs into late August.
Overall, there were ample signs that momentum likely has bottomed out, and stocks have begun the necessary stabilization process to expect that a move higher should unfold between now and next Monday which could carry US Equity indices higher into late August/early September. (SPX rallied 100 points from intra-day lows to Thursday’s mid-day peaks before failing.)
The rally into mid-day Thursday failed to hold near its intra-day highs, however, and retreated to end the session fractionally negative. However, this doesn’t tell the whole story, as five of 11 SPX sectors rose on Friday, and it was merely Technology that declined sharply to lose ground following its early bounce attempt.
This doesn’t indicate a failed rally (unless one’s timeframe is 2-3 hours), but both SPX and QQQ look to be very close to support and Equal-weighted S&P 500 shows this as well.
Momentum has improved given the extent that price moved off the lows, and some excellent relative strength happened in Financials along with Industrials, the latter being led by Transportation stocks.
There are two charts I’ll show below to make sense of this recent price action. The first showcases the current daily ^SPX -0.47% chart, which bounced to test initial resistance before turning back lower.
Prices bounced to right near the intra-day lows from last Friday (5497) but did not exceed this level, and this remains a structurally significant area for price currently and into next week. As discussed Wednesday evening, this 5497 level will need to be surpassed to have more confidence. However, the hourly wave structure seems to indicate any additional movement under this week’s lows should carve out a tradable low.
Additionally, positive momentum divergence would be apparent on any further weakness. Thus, lows seem close and likely materialize over the next 1-2 trading sessions.
S&P 500
The second relevant chart for Equities concerns the Equal-weighted S&P 500 ETF (RSP 0.24% ) by Invesco, as shown on a daily Bloomberg chart.
The breakout has led to consolidation and prices are now testing the area of the pivot of the former breakout. For those who practice technical analysis, charts like this tend to often illustrate how former areas of resistance become support when retested.
Thus, on an Equal-weighted basis, S&P looks to be very close to support.
Equal-Weighted S&P 500
Election year Seasonality bodes well for a late July bounce
July seasonality largely has played out as expected given historical average performance going back since 1950.
As shown below, July during Election years normally shows early Month strength, followed by weakness from 7/16 into 7/24.
Thereafter, a rally develops which carries index prices higher into early August.
While any strong rally might require some backing and filling as August gets underway, the risk/reward for SPX at ~5400 level looks compelling for a possible rally back to 5700.
I expect that a bottom to our July decline should be in place by early next week and lead SPX and QQQ higher.
Transportation stocks gearing up for a push back to new 2024 highs
Dow Jones Transportation Avg has found strong support near the area from former downtrend from March as well as uptrend from June, and this intersection has created some stabilization and a very sharp 2% rise to 3-day highs off this week’s lows.
While Thursday’s intra-day push higher failed, current levels are attractive for Transportation stocks and very encouraging towards Industrials.
It was notable that Airlines pushed higher today, despite some bad profit outlook guidance by AA 0.24% . Overall, I expect a push higher to test and exceed $16,307 for DJ Transportation Avg which was hit in early July. The current formation represents a very attractive risk/reward situation for Transports.
Dow Jones Transportation Average
SPX cycle composite should bottom in August, trend higher into September before beginning a slide into the Election
When reviewing the ^SPX -0.47% cycle composite since 2023, it shows a consistently upward bias, (albeit in a stair-stepping manner) until September. At present, however, it shows a downward slope until early-to-mid August.
Prices peak in September and could decline into Election time, which would gel with traditional Election year seasonality.
Given that the cycle in this case peaked for SPX in mid-July, ahead of the peak shown on this cycle composite, it seems like it more closely aligned with the current dominant cycle which turned down closer to when SPX peaked this past month. (See the line under the pink line, which represents the current short-term dominant cycle for the S&P 500.)
Importantly, I feel it’s key to watch for times when the cycle composite (pink line, which measures amplitude of a move, not magnitude) lines up with the dominant cycle for the SPX.
As can be seen below, the periods when they both were pointing higher, such as early 2024 and also Spring into July 2024 proved to be quite accurate.
Conversely, both were pointing down from March into May, which roughly aligned also with this year’s decline. (SPX actually bottomed in mid-April.)
Going forward, if this relationship continues, it would suggest a strong rally between early-to-mid-August into mid-September ahead of a sharp downturn into the US Election.
Note that given the downward bias of the current cycle, that even on an SPX rally in the next 1-2 weeks, it might be subject to some consolidation into mid-August before bottoming, which would help the SPX align with what this cycle composite seems to be suggesting.
Overall, the key takeaway from this model below is that dips should be bought into August for higher prices into September. However, once price pushes higher into September, it might be correct to anticipate a larger correction, and this might prove particularly volatile in the month of October. I’ll monitor this as we progress, and it’s important to note that this remains just one piece of the puzzle and should be utilized along with momentum and trend analysis.
S&P 500 (Cycle Composite)
