The first half of the year is in the rearview mirror. Although forecasting the stock market for the next six months is always tricky, I can say this for sure: There is an 84% chance the second half will start with a bang.
Why is that?
Historically, the first trading day of July is the most bullish day of the year. The S&P 500 SPX, +0.34% has been up 84.2% of the time (since 2000) with an average gain of 0.35%. The Dow Jones Industrial Average DJIA, +0.20% is up 79% of the time and the Nasdaq COMP, +0.20% 74%.
Read: How to invest for income when bonds pay pennies on the dollar
In investing, odds don’t get any better than that, but unfortunately having a good day doesn’t make anyone a good investor.
Are there any investable odds over a longer time frame?
It may seem odd that the most bullish day of the year occurs during the weakest part of the year (May-October). But as the chart below shows, July is actually the “best of the worst” months.
The S&P 500 seasonality graphs (top chart) explain why: July tends to be the home of the so-called summer rally, a brief but temporary bounce before the worst months of the year (August and September).
July through October tends to be more volatile in pre-election years than the average year, with a tendency of the July high and the August low both being tested in October.
Here is another interesting statistic: The first week of July (week 27) has a pretty solid track record in predicting how the entire year goes. It is correct 60% of the time; only four weeks score higher than week 27.
Of course, seasonality is only one of many indicators, and not every year adheres to seasonal patterns. But odds of a successful decision (buy or sell) increase when multiple indicators line up and point in a similar direction.
I published the purple forward projection in the June 2 Profit Radar Report and just added some seasonality-based annotations.
Based on seasonality, it is quite possible for the purple projection to become reality (summer rally followed by summer blues).
But let’s add one more layer of analysis: Price.
In order for seasonality and the purple projection to start playing out, the Dow Jones Industrial Average should not sustain trade above 27,300 points, and the S&P 500 would have to drop below 2,875 to unlock lower targets.
This article explains why the above DJIA and S&P 500 levels are important and features three more “keep it simple” charts for leading indexes.
Simon Maierhofer is the founder of iSPYETF and publisher of the Profit Radar Report.