What to Expect in August
Since mid-July we have been talking about a possible topping in the markets and the potential for some short-term selling. My models began lessening their exposure to the stock market about the 18th of July and are taking a defensive position as of the 1st of August. Here are the main reasons why:
The VIX, a measure of investor nervousness, is at a “complacent” low, well below its 50 day moving average. This level of complacency typically signals a pull-back in the making. If levels in the VIX start trading above the 15.42 mark I expect a significant selling trend to emerge.
Secondly, CBOE Put/Call ratio has been close to a least bearish extreme for several days now. This is typically another indication that investors are complacent (bullish). The ratio is just starting to move away from this least bearish extreme, suggesting that there may be some selling to come.
The third indicator of trends in the market is asset flows. This is the only indicator that has held the market at its current levels for the past two weeks. Asset flows have remained above their 21 day moving average, and until those flows of funds slow we will likely see more treading water at the “top” like we have seen the past two weeks.
Although we are not putting any new money to work right now, John Kosar from Asbury Research advises, “Until then, be patient and keep some powder dry as we expect there will be a better buying opportunity later on this quarter, once the pullback we are expecting runs its course.”
(Major market information from last week courtesy of Sherman Sheet, St. Louis, MO)
In the markets:
The U.S. major indexes finished the week mixed. The large cap indexes were flat to modestly lower, while the NASDAQ and smaller-cap indexes notched a fifth consecutive week of gains. The Dow Jones Industrial Average declined ‑138 points to 18,432, down -0.75%, while the NASDAQ composite rose +1.22% to end the week at 5,162. The LargeCap S&P 500 index was down fractionally, -0.07%, while MidCaps and SmallCaps rose +0.46% and +0.58% respectively. The S&P MidCap 400 moved further into record territory, and is the best performer year to date. The NASDAQ was the biggest gainer of the week, helped by strong earnings reports from Google (aka “Alphabet”) and Amazon.
In commodities, precious metals regained some luster as Gold rose +$34.50 an ounce to $1,357.90, up +2.61%. Silver joined gold in the plus column, rising +$0.66 to $20.35, up +3.34%. Oil, though, had a difficult week, declining -$2.59 to $41.60 for a barrel of West Texas Intermediate crude oil, down -5.86%.
July was a very good month for all major markets domestically and foreign. Oil was among the very few minuses, losing -14.38% for the month. The NASDAQ Composite led the parade of US gainers at +6.60%, followed by the SmallCap Russell 2000 at +5.90%. The LargeCap S&P 500 was no slouch, at +3.56%, likewise the Dow at +3.68%. Developed International markets as a group gained +3.98% (EFA), behind Emerging International’s very good +5.38% (EEM).
Of interest, a large majority of the gains were made in the first half of the month of July. The second half of July was lackluster.
U.S. GDP grew at a disappointing 1.2% annualized rate in the second quarter, according to the Commerce Department—far below economists’ expectations. Economic growth is now tracking at a 1% rate of growth in 2016, the weakest since 2011. Since the end of the recession, the average annual growth rate has been 2.1%, the weakest pace of any expansion since 1949. Gregory Daco, economist at Oxford Economics stated “Consumer spending growth was the sole element of good news…weakness in business investment is an important and lingering growth constraint.” Business investment fell -2.2%, its third consecutive quarterly decline.
Often the lack of business growth and low energy prices go hand-in-hand. This is a concern for the US economy in the near-term and would suggest the Federal Reserve will not be raising interest rates anytime soon.
We are looking forward to seeing what August will bring. Stay tuned!
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.