July 25, 2021
Weekly Market Outlook
By Keith Schneider
July often sets up conditions for late summer rallies, as well as significant tops.
As a result, July can be a frustrating and confusing period. Last week was a good example of why.
I’ll start with the bearish case…
#1) The market’s price action coming into last week set up the market indexes for a weak Monday, and weekend reports of rapidly increasing (and breakthrough cases) of the Covid Delta variant provided the news for a “news follows the markets Monday plunge.”
In other words, the market was beginning to roll over before Monday, but it needed a more identifiable reason to make it obvious.
#2) Mid-July is a seasonal high time frame, so the markets’ weakness coming into last Monday furthered the bear’s case for being cautious (if not down-right bearish) during last Monday’s sell-off.
#3) Our Risk Gauges were bearish, and several of the general stock indexes had bearish momentum readings suggesting breaks of support would lead to further declines.
With such a bearish list of conditions, why didn’t the market follow through to the downside, and how could you have trusted the rally would continue?
Traders who rely on the fundamentals could make the bullish case that earnings season is going well.
For example, Barron’s this week published….
“Some 88.3% of S&P 500 companies have beat their earnings forecasts—even more than over the past four quarters—while a ridiculous 84.2% have topped analysts’ expectations, compared with an average of 73.7% over the past four quarters. It’s hard to be bearish against that kind of backdrop.”
It’s a good point, but the markets can often have a surprising view of what the future holds.
So, we keep a closer eye on what the market is doing with the technicals, and as mentioned above, July can be a very pivotal month.
July may get its significance from the fact that it begins the second half of the year, it hosts an earnings season or some other reason.
Regardless, in our Complete Trader program and Mish’s Ultimate Trading (and Premium) programs, we teach a simple way to use July’s tendency to “create” a trend.
In short, we give the market a couple of weeks to establish a range that begins the second half of the year. Then we trade based on the patterns that develop in and around this range.
One example is to trade the low of the range for either a reversal low or a significant breakdown.
For the purposes of last week…
This year, the lower bound of the big range occurred on July 8th in SPY, DIA, and IWM, and July 1st for QQQ.
The chart below of the QQQ demonstrates how this “Calendar Range Low” is exactly where the market stopped and reversed.
I’ll explain why you might have expected this level to hold shortly, but first…
Below you’ll see a chart of the SPY with its July low noted.
SPY and DIA broke their July lows, but they didn’t “continue” (or confirm the breakdown).
So on Tuesday, with QQQ bouncing off its level like a trampoline and the SPY forming a reversal pattern, the stage was set for a rally.
Don’t Argue With The Generals Until They Breakdown
However, the biggest indicator that the market was not ready to break was that the “Generals” (as I’ll call them for this article) didn’t show any signs of breaking July lows.
These Generals are AAPL, AMZN, MSFT, FB, GOOG.
Collectively they make up 47% and over 21% of the market capitalization of the QQQ and SPY, respectively.
It will be very hard to have a big correction in the SPY or QQQ without their participation.
I encourage you to look at these stocks with the perspective of the July low.
Since you don’t know the exact formula for the July low, I’ve included FB’s chart below. The other stocks are obvious.
Of course, the market is not just 5 stocks, and there are some serious market corrections underway.
For example, the Russell 2000 (IWM) has not had a good July.
This and a host of other conditions covered in this week’s highlights and weekly videos give us good reason to be careful in how and where we place our bullish bets.
This week’s market highlights: