Market leadership and volatility in focus

Technical Stock Market Briefing for Day & Swing Traders
| By Harry Boxer, Technical Market Analyst

The final week of July was a volatile one, filled with a flurry of earnings reports, three central-bank meetings, and key labor-market data.

The Fed continued to hold rates steady even as Chair Powell recognized growing risks to the labor market. Corporate earnings are exceeding estimates, yet stocks have declined since the start of the second-quarter earnings season. Concerns about the growth outlook drove a U-turn in the recent rotation into cyclical and small-cap stocks, while the artificial intelligence
(AI) darlings experienced their biggest pullback this year.

Given the recent rotation out of growth stocks, all eyes were on the mega-cap tech stocks last week, as four of the Nasdaq Generals reported earnings (Microsoft, Meta, Amazon, Apple).

The tech giants reported strong growth, but that wasn’t enough to push prices higher for the group, as the bar of expectations was high. The tech-heavy Nasdaq entered correction territory (down 10% from its peak), as investors are growing increasingly impatient to see the heavy spending on AI translate into a return in these investments.

AI appears to be poised for rapid growth over the next five to 10 years and can continue to drive earnings for the companies that are spending heavily today to enable its development. However, there will likely be a timing gap between when the costs occur and when companies might reap the benefits of their investments.

Defensive sectors that tend to move inversely with bond yields could provide portfolio stability. Major consumer products Blue Chip giants such as Philip Morris, Coca-Cola, Colgate Palmolive etc. have surged lately. We can expect a broadening in market leadership ahead, highlighting the importance of diversification.

Volatility was subdued in the first half of the year, with the VIX index, a proxy for stock-market fluctuations, hovering around 14, which is 30% below its long-term average. But, the first weeks of the second half are sending a very different vibe.

Last Thursday stocks experienced the biggest intraday swings since late 2022. The S&P 500 was up 0.8% in the morning but then fell as much as 2% at its low before recovering some of its losses late in the day, and the selling continued on Friday after the jobs report.

Is this a sign of more challenging conditions ahead?

Historically, the three-month stretch between August and October has been the worst for stocks in terms of lower returns and higher volatility. However, this negative seasonality has been more pronounced when stocks were in a downtrend, rather when they were in a strong uptrend like they are this year.

Going back to 1941, whenever the S&P 500 rose by 10% or more in the first six months of the year, it has risen by 7% on average in the second half. And the percentage of time that returns were positive in the second half of the year was almost 80% vs. 66% for any given period. The one caveat is that pullbacks in the second half tend to be deeper than the first half, averaging 9%.

In any case, closely monitor the technicals and “Trade What You See, Not What You Think”