July should be a good month for stocks. It usually is. Over the past 65 years the S&P 500 has an average return of 1% during July.
Add to this the Volatility Index (VIX) buy signal that triggered last week, the ridiculously high put/call ratio last Friday, the extremely oversold conditions of the McClellan Oscillators, and the potential bullish setup in the financial sector, and we can make a pretty good argument that stocks will end the month higher than where they started it.
But there’s a fly in the bullish ointment… High-yield bonds may be flashing a warning sign.
Take a look at this updated chart of the iShares iBoxx High Yield Corporate Bond Fund (HYG) plotted along with its 50-day moving average (MA) line…
HYG usually leads the broad stock market by anywhere from a couple of days to a couple of weeks. So, last month, I suggested that as long as the high yield bond market was holding up then stock traders didn’t yet have too much to worry about.
That might be changing.
Last Friday, HYG closed below its 50-day moving average line. Lots of technical analysts view the 50-day MA as the defining line between an intermediate-term uptrend and an intermediate-term downtrend. By closing below its 50-day MA, HYG may have just entered a new downtrend.
You can see how quickly HYG sold off the previous two times it closed below its 50-day MA. The decline last November coincided with a small 1% drop in the S&P 500. And the decline in HYG that started in January came just a couple days before the S&P started a 10% correction.
So, like I said, there’s a fly in the bullish ointment. And it’s enough to keep me just a little cautious.
For the moment, I still think July will be a good month for stocks. But, if high-yield bonds continue to sell off, the odds could shift the other way.
Best regards and good trading,
Jeff Clark
P.S. Conditions like we’re seeing today are why I’m glad to be an option trader. While the mainstream media spends the day sweating over every downward move, me and my Delta Report readers are out looking for ways to profit.
In fact, there’s a convergence of factors in the market right now… and they could play out as soon as today. Click here to learn more.
Reader Mailbag
Today, a couple kind notes on the Delta Report’s recent performance…
Hi Jeff, I booked 46% gains on my trading portfolio for Q2… 157% year-to-date! I’m a happy camper. Thanks for all of your great trading advice, keep it coming! This is the first time I’ve ever delivered a triple-digit return on a 6-month basis across my portfolio! Looking forward to another strong quarter this summer for Q3. Enjoy your 4th :-).
– James
Great call on those GLD options Jeff! Already up 16% in just two hours. Can’t believe the action in the miners this morning. If this is anything like what happened in January of 2016, we could be in for quite a ride this summer. Not likely but it’s nice to dream big. Thanks again and keep up the great work, Jeff!
– William
Thank you, as always, for your thoughtful insights. We always look forward to reading them. Keep it coming right here.