Positive Seasonality Traps the Overconfident Bulls
As the first trading day of July brought positive action, the bulls got a bit too excited.
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As I discussed on Wednesday morning, the first trading day of July has historically delivered positive returns. It is largely driven by inflows into 401k and retirement funds and also receives a boost from the good spirits that typically exist in front of a holiday.
The odds favored the bulls, but they were overconfident and were caught in an ugly intraday reversal this time. The action started off nicely with strong breadth approaching 70% gainers but it peaked about three hours into the trading day and there was steady selling the rest of the day.
At the closing bell all the major indices were in the red with the Nasdaq 100 (QQQ) looking particularly poor with a loss of 1.5%. The good news is that breadth was still positive due to pockets of speculative action in small stocks and the Magnificent Seven enjoyed an energetic bounce of 2.3%. It is odd to see the Nasdaq 100 act so poorly when its largest components did so well.
The Intraday Reversal Signal
Intraday reversals with a weak close always make me cautious. The action is an indication that buying power is being exhausted, and it will be difficult to sustain upside momentum. Typically, market participants start looking harder for reasons and excuses to sell, and it never is difficult to find one. Volume is thinning out in front of the holiday, and that adds to the volatility and will trigger tight stops.
Game Plan
I increased my cash position to over 50% by reducing my exposure to the biotechnology sector. I remain optimistic about opportunities created by rotational action, but we have two weeks before earnings season starts, and I see no major positive catalysts on the horizon before then. My goal is to keep accounts close to highs and to be in a position to reload key names as we move into potential catalysts during earnings season. This was not an attractive session and shouldn’t be ignored.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
