Investors Bearish As The Stock Market Soars

It was another week of better-than-expected economic data, which ended with a record-breaking increase of 4.78 million jobs in June. The S&P 500 rose every day before the jobs report, as last Monday’s early weakness was met with buying.

It was a solid week of gains, led by 5% rallies in both the Nasdaq 100

NDAQ
and Dow Jones Utility Average. The iShares Russell 2000 was not far behind, gaining 4.2%, with the S&P 500 up 4%. For the week, 2411 issues were advancing and just 637 were declining on the NYSE offsetting the negative numbers from the prior week.

It was noted last week in the press that the S&P 500 just recorded its best quarter since 4^th Quarter of 1998, when the index gained 20.8%. Similar to our current situation, the 4^th Quarter of 1998 was also preceded by a quarter of financial market turmoil: the July 1998’s Russian ruble crisis. For the third quarter of 1998, the S&P 500 was down 11.4%. I covered the S&P’s bounce back earlier this year (see chart).

Many other analysts are also looking at the historical patterns. A study from SunTrust

STI
found that, with such a strong quarterly performance, the S&P 500 should be higher next quarter and also in the 2^nd Quarter of 2021. These historical patterns are quite interesting but it should be noted that the seasonal patterns for the 3^rd quarter are generally not favorable.

Since the 1950’s, the S&P 500 has gained 0.5% on average in the 3^rd Quarter, compared to increases of 1.9% to 3.8% in the other quarters. In most of the years, the most serious market weakness occurs in August and September, as prices are often slightly higher in July.

The technical outlook improved with last week’s action, as the ranges in the NYSE Composite have narrowed over the past three weeks. Better support is now developing in the 11,500 area with the uptrend at 11,484 (line b). The close last week was above the 20-week exponential moving average (EMA), with the chart showing next significant resistance at 12,805 (line a).

The close last week favors higher prices after the holiday, as the weekly NYSE Advance/Decline Line turned up last week, nearing the June high. The A/D line is well above its rising weighted moving average (WMA), as well as the uptrend (line c).

The data from the latest American Association of Individual Investors (AAII) survey may support a further rally. Historically, these numbers are used as a contrary indicator so that…