Summary : Bank of America technical strategists studied the performance of the market in August and September after the S & P 500 racks up notable gains in July. They found that after a July rally of at least 5%, the S & P 500 was higher in August 59% of the time with an average return of 2%. But in midterm years when July is up 5% or more, the S & P 500 was up 77% of the time in August. Mark Newton, Fundstrat global head of technical strategy, said he expects stocks to see some turbulence early in August before the market improves later in the month and continues higher into mid-September.
The odds are better for a good August market after July’s strong gains, but some strategists who watch stock charts expect at least one more big round of selling before the market glides higher into the end of 2022. For now, there are some overall bullish signs for the market, like the roughly 13.5% gain for technology stocks in July, the drop in bond yields, and the improvement in market breadth. Bank of America technical strategists studied the performance of the market in August and September after the S & P 500 racks up notable gains in July. They found that after a July rally of at least 5%, the S & P 500 was higher in August 59% of the time with an average return of 2%. It also was higher in September 55% of the time with an average return of 0.7%. But in midterm years when July is up 5% or more, the S & P 500 was up 77% of the time in August. However, returns were lower, averaging just 1%. In September, during those years, the S & P 500 was up 69% of the time with an average of return of about 1.3% “July 2022 marks the best July ever during the midterm year of the Presidential Cycle. A positive July bodes well for August and September in the midterm year,” noted the Bank of America strategists. Choppiness around the corner? Mark Newton, Fundstrat global head of technical strategy, said he expects stocks to see some turbulence early in August before the market improves later in the month and continues higher into mid-September. At that point, there is the potential for more chop before a move higher into year end. “I think it’s likely the first couple weeks of August have the potential to be a negative, and the back half should be very strong,” he said. Newton also expects the back part of the year to be strong, the pattern seen in many midterm election years. Ari Wald, head of technical analysis at Oppenheimer, said August in general tends not to be great, but September could be worse. “I’m worried about September. We’re not there yet. It’s not that August is good. You don’t usually see a lot of progress. It’s technically a below-average month,” he said. Wald said, however, he is in the “market recovery camp,” and the market is base-building. “The market is continuing to build off June’s capitulation low,” he said, noting rising bond yields have moderated. “I think there’s upside into 4,300 in August.” But there could be another bout of selling in September that takes the market to a low that would still be above June’s low of nearly 3,637. Following that move, stocks could turn higher in the fourth quarter, he added. August emerges as the ‘true tell’ BTIG’s chief market technician Jonathan Krinsky does not believe the market has bottomed just yet. He expects stocks could find a new low in the next month or two and then head higher. He expects a fresh low around 3,500 on the S & P 500. But Krinsky said he could be dissuaded from his view the S & P 500 has not bottomed, if it were to rise to key levels. “4,177 was the June high. July was inside June’s range. So if we took June’s high that would be notable,” he said Strategists have been watching the 4,177 level on the S & P 500 as a point of resistance. The S & P was flat at about 4,112 in afternoon trading Monday. Krinsky said if the S & P 500 were able to go above June’s high that would be a positive and suggest the trend is shifting. He also noted the 50% retracement level of the S & P 500’s entire decline is 4,231. Typically in a bear market, once there is a decline of 20% or more on a closing basis, the index rarely exceeds the 50% retracement level unless it has already put in a bottom. “It’s hard to call July anything but a true win for the bulls, but August is likely the true tell,” he noted. Fundstrat’s Newton said one sector that could suffer in August is energy. He expects oil, down nearly 5% on Monday, could continue to decline to the $85 per barrel range. West Texas Intermediate crude futures were just under $94 per barrel in afternoon trading. “Most of energy can get smushed in the short run,” he said. “I am a longer term energy bull.” But in the near term, oil is making a technical break. “Energy is not going to be the place to hide in August,” Newton said.