July is historically the best month of the year for the stock market. And with the stock market coming off of the best first half to the year in 40 years, everyone can assume that this July will be extremely bullish as well. This week we celebrate US independence on July 4, which means a shortened trading week for the stock market. The stock market closes early at 1pm on Monday, July 3, and the stock market is closed on July 4. As usual, futures will continue to trade as normal. And despite the shortened trading week, we also have some big economic news being released on Friday that could move the markets.
Last Week Recap
The big news last week was Friday’s PCE inflation data that came in lower than expected, partially due to income increasing more than expected. But while the headline PCE dropped to just 3.8% year over year, the core PCE (which is what the Federal Reserve uses to determine future interest rate hikes) remained sticky at 4.6% year over year and 0.3% month over month (https://www.cnbc.com/2023/06/30/pce-inflation-may-2023-.html). Until core PCE starts dropping, the Federal Reserve is expected to continue to raise interest rates. Despite that, the market responded favorably to the headline PCE with the S&P finishing the week up more than 2% and the NASDAQ finishing the week up just under 2%.
Market Sentiment
The fear and greed index (https://www.cnn.com/markets/fear-and-greed) rose back into Extreme Greed last week, finishing at 80 out of 100. This was mostly due to the PCE data showing headline inflation continuing to slow down. And the extremely bullish market sentiment can also be seen in the latest survey data as most investors now believe there will not be a recession in 2023 (https://www.cnbc.com/2023/06/30/most-investors-believe-we-are-in-a-new-bull-market-and-there-will-be-no-recession-in-2023.html). To be sure, there is plenty of leading economic data showing the economy is slowing down and slowly entering a recession, but for now investors are ignoring the leading data and focusing on the official economic data that shows inflation is coming down and the labor market remains strong.
This extreme greed doesn’t appear to be going away any time soon, and with July historically being the best month of the year, there’s no reason to believe the market will fall out of this extreme greed cycle any time soon. But investors should be aware that market sentiment can change suddenly. Once investors start focusing on the rest of the economic data that shows the economy is headed for a recession, the market sentiment can quickly turn bearish. As Warren Buffett says, “Be fearful when others are greedy.” Stocks should continue higher in July, but this might be a good month to take profits, as August is historically flat, and September is historically the worst month of the year for stocks.
The volatility index (VIX) traded mostly flat last week, finishing up just 1.12% at 13.59. This is still extremely bullish, and indicates the market will continue to rise for the next few weeks.
Technical Analysis
On the daily charts, all 4 major indices remain bearish on the MACD, but all other indicators are bullish. It should be noted that the MACD is very close to turning bullish once again on all four major indices, and once it does the technicals will be 100% bullish once again. That said, there are some concerns to watch out for. First, the RSI on all 4 major indices is approaching overbought. While it’s not there yet, it is getting close, meaning that after this week, we might see the market take another breather. Another area of concern is that because Friday was so bullish, the DOW, S&P, and NASDAQ all formed gaps on the daily candles. Gaps usually, but not always, get filled, indicating that the market might have a red day possibly on Monday or Wednesday to fill in that gap before continuing higher.
The weekly charts continue to be 100% bullish on all 4 major indices. There are only 2 concerns on the weekly charts. The first is that the candles on the DOW, S&P, and NASDAQ all closed at the 78.6% Fibonacci Retracement level again without breaking through. This is a strong resistance level for the markets. The second area of concern is that on the S&P the RSI is very close to overbought, and on the NASDAQ the RSI is overbought at 74. An overbought RSI indicates the market may be topping out and due for a correction. In my mind, a correction won’t happen until later this month as there are no catalysts to cause a change in market sentiment until then.
Economic News
The big economic news this week will be the official jobs numbers for June that come out on Friday. On Friday we will get the US unemployment rate for June as well as the US hourly wages for June. The forecast is for unemployment to have fallen in June to 3.6% from 3.7% in May, and for hourly wages to have stayed the same at a 0.3% month over month increase, but decreasing slightly on an year over year bases to 4.2% from 4.3%. In lesser economic news we will also get the private payroll numbers for June on Wednesday.
Here’s the full list of all of the economic news coming out this week as well as the time each report is being released: https://www.marketwatch.com/economy-politics/calendar
Here’s what time each Fed member is speaking this week: https://www.federalreserve.gov/newsevents/calendar.htm
Earnings
With the shortened holiday week, we only have one major company reporting earnings this week, and it’s Levis on Thursday. But investors should be aware of what Nike reported last week. Nike posted their first earnings miss in 3 years as lower margins hit profits (https://www.cnbc.com/2023/06/29/nike-nke-earnings-q4-2023.html). This shows that business no longer have pricing power, meaning they’re no longer able to raise prices in order to keep up with inflation. And it could be a sign of trouble for the Q2 earnings season that starts at the end of this month. Nike’s earnings are yet another sign that the economy is slipping into a recession. And some analysts believe that while the stock market should rise in July, it might start selling off at the end of July as earnings season starts and companies are unable to meet their earnings expectations (https://www.marketwatch.com/story/nike-profit-misses-expectations-as-higher-markdowns-endure-amid-weaker-demand-dc4e693f?mod=home-page). Most troubling for the stock market though would be companies decreasing their forward guidance. While Q1 earnings benefited from a boost in consumer spending, many companies reported last quarter that January was great while February and March slowed down considerably. If that slowdown continues in Q2, as Nike showed it very well may have, then this earnings season could be the end to the stock market rally.
Other Things to Know
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Wishing you the best of success trading this week,
Stock Curry