Are You Not Entertained?

“Are you not entertained?” Maximus Decimus Meridius (Russell Crowe) in Gladiator (2000) after he quickly disposes of all of his opponents in the arena

Are we having fun yet? Let’s just start with the KOSPI in South Korea. It had outright crashed to the tune of 44%, until Friday, when it soared a record 17%! For the week? Still down 2%.

Stocks in the US tanked after the Federal Reserve didn’t say much on Wednesday, but then most of the losses were negated with a huge surge on Thursday thanks to Microsoft and stronger earnings. For more of our thoughts on the Fed and what they did (or didn’t say), be sure to check out The Fed’s Going To Let It Run Hot (Until They Don’t) by Sonu Varghese, our Chief Macro Strategist.

Put It In Perspective

Let’s put things in perspective here. Yes, July is looking like stocks will be lower, but honestly, not by that much, with the S&P 500 down about 1% with a day to go in the usually strong month of July. This, of course, follows June, when the S&P 500 fell 1% as well, so we are looking at two lower months in a row. Here’s the catch (and there’s always a catch), the S&P 500 soared nearly 16% in April and May, so maybe some slight give back isn’t the worst thing? I look at the chart of the S&P 500, and I find it quite encouraging that we are simply correcting via time, as the bull catches his breath for the next assault higher.

The Bad News

Here’s the bad news: it is pretty rare for stocks to be lower in both June and July; in fact, some of the worst years in history saw this. Years like 1974, 1990, 2001, 2002, and 2008 all saw this dubious distinction.

As you can see here, when these two months are lower, the rest of the year falls more than half the time, with an average decline of more than two percent. We still see many more reasons than not to remain bullish the rest of this year, but let’s just file this under one to watch.

Beware the Ides of August

I’ll talk more about August soon, but be aware that this is the one month of the year that simply seems to have totally out-of-the-blue events happen that rock markets. In recent memory, no one was talking about the yen carry trade this time two years ago, yet by that first Sunday night in August, global markets were all crashing, and we all became currency experts overnight.

The bottom line is August (and September) can be trouble or, at the very least, volatile. We are still in a bull market, and we still expect higher prices by year-end, but would some usual August/September volatility really be a shock here? Especially in a midterm year? Probably not, so prepare now for that.

Markets Tend To Test A New Fed Chair

We discussed this in our Midyear Outlook: Still Riding the Wave, but markets have a funny way of testing new leadership at the Federal Reserve (Fed). Well, things have done ok since Kevin Warsh took over, but the S&P 500 did tank more than 1% at his first two Fed meetings.

I think his real test is coming from the bond market, with yields soaring and the 30-year yield at its highest level since 2007, but a test from stocks wouldn’t be a surprise either. We’ve shared this before, but be aware that early in a new Fed tenure, you can most definitely get some equity weakness.

It Isn’t All Bad

Listen, it isn’t all bad; in fact, there are many reasons to still expect the S&P 500 to gain between 15-18% in 2026, as we laid out in our Midyear Outlook. Earnings season has been spectacular so far, justifying stocks at these levels and likely even higher levels.

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I like to use technicals, and one of my favorite indicators is market breadth. If many stocks are participating in the rally, then it is a sign the bull is on firm footing. Earlier this week we saw the NYSE common stock only advance/decline line hit an all-time high. This is simply a cumulative tally of how many stocks go up versus down each day. Market breadth leads price, and to see this very broad-based index hit a new high in breadth, it likely means price will follow. Not to be outdone, the S&P 500’s A/D line also hit a new high this week.

Lot of Fear Out There

There are many ways to look at market sentiment, but safe to say that most individual investors have been quite impacted by the AI/semi/momentum crash we’ve seen in July. The CNN Fear & Greed Index is firmly in the fear range, while various put/call ratios are showing levels consistent with major lows.

Source: CNN
Just last week we saw one of the largest drops in bulls in history (down 15%) in the AAII Sentiment Survey, and bulls are still only 31% currently.

Source: AAII

The bottom line, with the S&P 500 about 2% from all-time highs, we are seeing way more worry than you’d expect, which could be quite bullish from a contrarian point of view.

Banks Don’t Lie

Shakira said hips don’t lie, and I’m not one to argue with her, but I’d like to add that banks don’t lie. It is hard for me to think the end is near when bank stocks are breaking out to new highs after basing for many years.

Remember 2007? Yes, stocks peaked in October, and they were cut in half over the next two-plus years as the Great Financial Crisis took hold. Well, back then banks peaked in January and were in some cases crashing well before the overall market peaked; in other words, banks were the warning sign. That isn’t at all what we are seeing now, and I think banks are now the warning sign that things are really good and this bull is alive and well.

My friend JC Parets, founder at TrendLabs, shared this chart of the S&P 500 Bank Index. JC joined us on Facts vs Feelings last week, and it was our most viewed ever; check it out if you haven’t yet.

Just Wait

We will leave on this potentially positive note. Some of the very strongest quarters of the four-year Presidential cycle are just around the corner, beginning in Q4 of this year (a midterm year). Should we have any seasonal weakness in the coming months, don’t panic and know that better times are likely coming.

As always, thank you so much for reading what our team has to say. We truly appreciate it, and we will continue to do our best to navigate these interesting times.

For our latest on the chip crash, be sure to watch our latest Facts vs Feelings below. Thanks!