The July indicator

  • Stocks started the second half of 2019 in the plus column
  • Initial second-half gains have often signaled strength for the remainder of the year

While every December brings the latest ruminations on the “January indicator”—whether the stock market’s performance in January (and its gain or loss in the first few days of the month) signals its likely direction for the remainder of the year—you don’t hear much about July.

In other words, does the market’s performance in the early days of the second half appear to have any relation to how the remainder of the year pans out?

So let’s start from scratch.

Stock market fireworks” noted that while July has traditionally been one of the weaker months of the year from a long-term perspective, it’s been more bullish lately—up eight of the past 10 years.

This July started in the bullish camp, with the S&P 500 (SPX) posting a 1.2% gain in the first five trading days of the month (through Monday), despite a minor pullback following the July 3 record high.

And although experienced traders don’t attach too much significance to a handful of days, over the past 20 years an SPX gain in the first five days of July has been followed by:

S&P 500 returns following first five days of July

Source: Power E*TRADE

This table shows that the SPX has gained ground in the first five days of July in 12 of the past 20 years. When that happened, the remainder of July tended to be so-so: positive six times and negative six times, for a median return of -0.3%. But the remainder of the second half was a different story, with the SPX posting a net gain in eight of 12 years, with a median return of +5%.

When the first five days of July produced a loss, however, the script was flipped: The SPX rallied the remainder of July five of eight times for a median return of +0.9%, but rallied the remainder of the second half four of eight times for a median return of only 2.7%.

There will be plenty of time for other factors to push to the fore, but since 1999, when traders have started the second half bullishly, the market has tended to post bigger gains in the second half than when traders instead sell stocks in early July.

Market Mover Update: In case you’ve been on a remote desert island the past 24 hours, the S&P 500 topped 3,000 for the first time in its history yesterday.

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