As we round out the month of July and look toward August, there are three primary items on my focus list:
- Earnings season continues
- Geopolitical and political rumblings (North Korea, Russia, Washington)
- August stock market volatility (or the lack thereof)
This week we get another full crate of corporate earnings season to chow through on both sides of the Atlantic with Apple Inc. (NASDAQ:AAPL) and Tesla Inc (NASDAQ:TSLA) likely taking center stage.
Last week’s earnings by Amazon.com, Inc.(NASDAQ:AMZN) and other ‘tech’; heavyweights did little to derail the Nasdaq 100 as represented by the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) from its year-to-date one-way stampede higher.
As of last Friday, AAPL stock makes up 11.5% of the QQQ ETF, followed by Microsoft Corporation (NASDAQ:MSFT) with 8.3%. While it is not my base case that AAPL stock will crater following the earnings report on Tuesday, considering the stock’s heavy weight in the Nasdaq 100 and where the QQQ ETF is currently trading on its chart, the price action following the earnings report will be particularly important to watch and respect.
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
The QQQ ETF in recent months has blasted higher and out of its long-term already steep up-trending channel (purple-dotted parallels). This has resulted in a record overbought reading in the MACD momentum oscillator at the bottom of the chart.
To be clear, this does not mean nor call for an immediate drop in the index this week but rather through the intermediate-term time frame in my eye does not make this a particularly high-probability spot to add fresh long positions in large cap tech or the QQQ ETF.
Ultimately the odds are high that through a multimonth/quarter lens the QQQ ETF does mean-revert back into the longer-standing upward channel somewhere in the $120-$130 range.
Geopolitical and political rumblings over the past few days have once again floated to the top of the headlines. However, North Korea missile tests, Russian sanctions and the goings-on in Washington have yet to put as much as a scratch in the U.S. stock market.
While the month of August, historically speaking, is still is a positive month for the S&P 500, in my experience it is also one of the most binary months for stocks. For one reason or another, there is an above-average tendency for geopolitical and political “stuff” to cause an unexpected jolt in stocks and thus a spike in volatility in the month of August.
On the other hand, barring such a jolt August can also be one of the most “boring” of months for stocks, as many market participants are enjoying the end of summer at the beach.
Conclusion
So, how will we make money in August?
What has worked all year and likely will continue to work regardless of an uptick in volatility is group and sector rotation in the U.S. stock market.
Take the last couple of weeks for example, where energy stocks have rallied 3%-4% and transportation stocks dropped 5%-7% in what was another classic money rotation move (see the chart above). My proprietary trend algorithm scanner alerted us of both the bearish to bullish reversal in energy and the bullish to bearish reversal in transportation stocks two weeks ago and allowed us to position and profit accordingly.
As a side note, more than 80% of one’s portfolio returns can be explained by one’s asset allocation, i.e. being in the right sectors or asset classes as opposed to single-name stock picking.
What about the S&P 500 you ask? Well, last week the CBOE S&P 500 Volatility Index (VIX) briefly dipped below 9 (all-time lows), which continues to signal all-time-high investor complacency. While this too can continue on for a while, ultimately volatility tends to come back with a vengeance, forcing traders and investors to quickly adjust and thus further stoking the fire.
As such in this environment and heading into August I am a buyer of portfolio protection via put options in the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), all the while respecting the ongoing broader up-trend in stocks as well as the sector and group rotation.
Check out Serge’s Trade of the Day for July 31.
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Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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