Improving momentum has kept NASDAQ’s Seasonal MACD indicator positive and its trend is also now positive (blue line expanding away from red line in MACD pane of chart above). As of today’s close, it would take a single-day decline of 700.38 points (5.08%) to turn MACD negative. Continue to hold associated positions in QQQ and IWM. When NASDAQ’s Seasonal MACD turns negative we will send an email to all active members. At that time, we will finish repositioning our Portfolios for the “Worst Months.”
Bubbly Sentiment Drives Summer Rally Hype
NASDAQ’s charge higher and S&P 500’s break out have turned sentiment bullish. According to Investor’s Intelligence latest Sentiment survey as of June 13, bullish advisors reached 53.4%, bearish advisors have slipped back to 20.6% and correction advisors are at 26.0%. This is only the third week of 2023 with bullish advisors above 50%. This is also the most bulls since November 2021. The current level of bulls suggests that limited capital may remain on the sidelines to drive the market higher. Yet another sign of growing trader and investor complacency is the CBOE VIX index declining to its lowest levels since January/February 2020.
Such an improvement in sentiment will likely trigger earlier than usual talk of the perennial summer rally. On page 74 of the 2023 Almanac the DJIA’s seasonal rallies are presented. Historically, the summer rally has been the weakest of the four seasons for DJIA. With NASDAQ clearly providing leadership to the market we present NASDAQ’s Seasonal rallies below since 1971.
Using the same definitions for the starting and ending point of each season’s rally as used in the annual Almanac, the market is officially still in its spring rally as Q2 has not yet ended. NASDAQ’s seasonal rally performance does not differ all that much from DJIA. Historical performance for spring and fall rallies are relatively close for both NASDAQ and DJIA. Winter is best for both while summer is also weakest for both. Even NASDAQ’s best summer rally of 40.3% in 1980 is dwarfed by its 70.1% winter rally in 2000. It would seem the same warning that applies to DJIA also applies to NASDAQ, “beware the summer rally hype.” This was certainly on point last year when the market’s summer rally abruptly ended in August.
As of today’s close, NASDAQ’s spring rally stands at 23.7%. This is comfortably above the historic average of 15.0%, but still less than half of the best spring rally of 47.7% in 2020. Using NASDAQ’s May 4, 2023, closing low through today’s close, NASDAQ’s summer rally potentially stands at 15.2% which is slightly above historical average. We will wait for our NASDAQ Seasonal MACD sell signal to tell us when the current rally has run its course.
With the end of June quickly approaching, it is also time to be on the lookout for the market’s volume doldrums (page 48 STA 2023). Historically, trading activity and volume has tended to begin to fade near the end of June or the beginning of July. As of the close on June 14, NASDAQ and NYSE volume has been trending higher along with the major indexes. Should volume begin to decline, the indexes could do the same.
Despite the pause in interest rate hikes yesterday, inflation and the Fed remain headwinds to the market. After yesterday’s announcement and press conference, interest rate expectations are still in flux. The Fed’s mixed signals of pausing now and threatening more hikes down the road tells me their crystal ball is no better than anyone else’s. A data-driven approach makes perfect sense but why not just come out and say as much.
Recent declines in inflation metrics are encouraging and potentially concerning at the same time. One of the Fed’s preferred metrics, Personal Consumption Expenditures (PCE) did tick higher in April. CPI and PPI readings in May did move lower so May PCE should make a similar move lower. If it does not, then the Fed’s recent hawkish remarks and interest rate forecasts would likely become more meaningful. The Fed may also be realizing that it is not only fighting the inflation from record liquidity and federal spending during Covid, but also the continued substantial amounts of federal spending authorized by the CHIPS and Science Act, the Infrastructure Investment and Jobs Act, and the Inflation Reduction Act.
In addition to typical seasonal weakness during the Worst Months, the market could have to contend with interest rates going still higher and remaining higher for longer than expected. We expect the current tech-driven rally to persist for the next several weeks but remain cautious as NASDAQ’s “Best Eight Months” near its end and bullish sentiment is nearing frothy levels.