August Mid-Month Conference Call: 5 Key Takeaways

1. Seasonal Tailwinds Favor Bulls

When we’re interpreting information from markets, it’s always important to do so with an understanding of the present environment. We need to be aware of the conditions we’re operating under so we can employ the appropriate tools and strategies. 

As it turns out, the current environment is a very favorable one from a seasonal perspective. The third quarter of midterm election years are one of the best calendar periods for equities throughout history. We’re in the heart of it now.

What we’re doing here is combining the Annual Seasonal Cycle with the 4-year Presidential Cycle and the Decennial 10-year Cycle to create our Composite Index (in blue).

As you can see, the actual S&P performance has followed the seasonal trend very closely over the trailing year and a half. If it continues, it will mean higher prices for stocks into the back half of the year.

2. Internals Turn Up

Recent improvements in market breadth and internals continue to suggest the bottom is in for stocks. When looking to identify a market bottom and the start of a new uptrend, nothing is more paramount than the breadth thrust.

The percentage of S&P 500 stocks at new 20-day highs is a great example. And it just fired a breadth thrust last week, hitting >55% for the first time since the Spring of 2020.

Going back to the 1970’s, we’ve seen this indicator pierce the 55% level just 28 times. And of those 28 times, the market was only lower 12-months out on one occasion, which was in 2002.

While this certainly bodes well for the bull camp, the real way we’ll know if this is truly an initiation phase is by getting more breadth thrusts in the future. They tend to come in clusters when they are worth paying attention to. And we’re starting to see this now as we’re getting thrusts in intermediate-term highs and our momentum indicators as well.

3. Risk-On Rotation

Rotation is the life blood of any bull market. We learned that from the legendary Ralph Acampora, founding member of the CMT Association.

What’s interesting about the rotation that we’re seeing now is that the higher beta, or riskier areas of the market are assuming leadership over longer timeframes. That speaks to a burgeoning risk appetite among investors. The chart below overlays the Discretionary vs Staples ratio with the ARK Innovation ETF $ARKK.

In an environment where investors are favoring risk-on stocks over defensive stocks, it makes sense to see growth indexes like ARKK find a floor and start resolving higher. 

Money flowing out of more defensive areas of the market and into the most beat-down risk-on sectors is another feather in the hat for the bulls. This kind of high-beta leadership is a common characteristic of market bottoms.

4. Still Work to Do

Breadth thrusts, seasonal tailwinds, and risk-on rotation are just some of the recent developments that suggest bulls are back in the driver's seat and risk appetite is reentering the market.

But despite all the bullish activity, from a technical perspective there is still work to do. This is especially true at the index level. The chart below tells the story well.

As you can see, the Dow Jones Industrial Average is running into a critical resistance level after bouncing off its June lows. This isn’t just the case for the Dow, we’re seeing all the major averages run into a confluence of overhead supply at current levels.

While evidence continues to stack up to suggest stocks have stopped falling, it doesn’t necessarily mean they are ready to start rising just yet. Bottoming is a process. It often comes with a prolonged period of sideways or trendless action as it can take time to repair the damage and absorb all the supply looming overhead. 

Long story short, it’s a good time to be patient and allow for some corrective action following such a strong rally off this summer lows.

5. The Squeeze is On

When we dive beneath the surface and look at our industry groups, banks are always a critical piece of the intermarket puzzle. They provide an excellent outlook of the current market environment and risk appetite.

A few months ago, banks appeared to be breaking down from their multi-year ranges, but sellers never achieved much in terms of downside follow-through. Fast forward to today, and buyers have repaired the damage by reclaiming key former lows.

Bulls are now in control, and with prices back in their former range, these consolidations look more like failed tops.

As long as this is the case, the squeeze is on for this economically sensitive group of stocks. This is a bullish signal for equities and risk assets in general. After all, we can’t have bull markets without the participation of banks.

That’s it for this month’s key takeaways!

As always, Premium Members can rewatch the Conference Call and view the slides here!

We hope you enjoyed our recap of this month’s call. Thanks for reading, and please reach out to us with any questions!

Allstarcharts Team