July is historically a great month for U.S. stocks. Here's why this year might be different.

By Isabel Wang

A summer stock pullback could be in the cards despite seasonal tailwinds, strategists say

The U.S. stock market is on pace to finish the first half of 2024 on a positive note, with a rally in some of the world's largest technology companies propelling major stock indexes to multiple all-time highs. If the past is any guide, the good times for U.S. equities may keep rolling into July - but not every stock may enjoy this summertime rally.

Since 1928, July has emerged as the best month of the year, on average, in terms of stock-market performance. Over that time frame, the S&P 500 SPX has experienced a gain of 1.7% in July and finished the month higher more than 60% of the time, according to Dow Jones Market Data.

Meanwhile, the Dow Jones Industrial Average DJIA has delivered an average monthly advance of 1.4% in July, also making it the best month of a year for the blue-chip index dating back to 1897. The Dow has recorded positive returns in nearly 65% of Julys since then, according to Dow Jones Market Data.

The three major stock indexes have been up for nine consecutive July periods, while the small-cap Russell 2000 index RUT has risen seven straight times.

Such strength inevitability stirs talk of a summer stock rally, but investors should beware the hype, as it has historically been the weakest rally of any season, said Jeffrey Hirsch, editor of the Stock Trader's Almanac and Almanac Investor Newsletter.

July begins what is usually the Nasdaq Composite's COMP worst four months of the year and has averaged a monthly gain on that index of less than 1% since 1971. Over that time frame, July has been the sixth best performing Nasdaq month, according to Dow Jones Market Data.

"Dynamic trading often accompanies the first full month of summer as the beginning of the second half of the year brings an inflow of new capital. This creates a bullish beginning," Hirsch wrote in a client note last week. But he added that over the past 21 years, nearly all of July's gains have occurred in the first 13 trading days of the month.

Meanwhile, in election years since 1950, July has tended to be "a dull month filled with choppy trading," Hirsch said.

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Things also don't look so promising for small-cap stocks. The Russell 2000 has recorded an average return of 0.3% in the month of July, making it the fourth worst month of the year for that index since 1987, according to Dow Jones Market Data.

U.S. stocks are increasingly diverging in the first half of 2024. Such divergence has become more extreme in June, as the Dow and the Nasdaq moved in opposite directions in eight out of the last 10 trading days as of Tuesday, the longest such streak since 1995, according to Dow Jones Market Data.

"The latest stock rally in June has been the most pronounced we've seen in a while in terms of price moving higher and underwhelming breadth below the surface. We're seeing some record-low breadth for a market at record highs," said Adam Turnquist, chief technical strategist at LPL Financial.

As a result, he told MarketWatch via phone on Wednesday, "I think you can make the case that we could see a pause [in stock rally] over the summer, and a pullback is definitely in the cards."

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The Nasdaq in June has advanced 6.7%, outpacing the Dow industrials' 1.1% month-to-date gain by the widest margin since May 2023, according to FactSet data. The blue-chip gauge has missed out on the tech rally with less representation from Big Tech names, with only three of the so-called Magnificent Seven group of stocks - Amazon.com (AMZN), Apple Inc. (AAPL) and Microsoft Corp. (MSFT) - in the Dow index.

Stocks are still on an 'oversold uptrend'

Dave Lundgren, chief market strategist and portfolio manager at Little Harbor Advisors, said that normally, a stock-market divergence could lead to either a minor correction with a less than 10% decline or an actual bear market with stocks tumbling over 20%. But for now, he said, "this period is not doing any damage to the long-term stock trend," as some of the non-tech-related stocks are still "very very oversold."

As of Wednesday afternoon, around 56% of the S&P 500 stocks were trading below their 20-day moving average, and nearly 34% were trading below their 200-day moving average. Two months ago, over 90% of the S&P 500 components were below their 20-day moving average, according to FactSet data.

The 20-day and 200-day moving averages are considered key indicators by traders and technical market analysts for determining overall short-term and long-term market trends.

"The short-term moving averages help you identify the momentum of the trend - that is, overbought or oversold - while the long-term moving average helps you define the trend itself," Lundgren told MarketWatch in a phone interview on Wednesday. "Most stocks are above that 200-day MA, but when [most stocks] are also below the 20-day MA, you step back and look at the context of that very oversold condition, it is still a long-term bullish uptrend."

Lundgren advises investors to "always take seasonality in the context of the current market conditions" and gauge if the markets could support historical trends playing out.

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U.S. stocks were edging higher on Thursday morning, with the Nasdaq rising 0.2% while the Dow was flat and the S&P 500 was up 0.1%, according to FactSet data.

-Isabel Wang

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06-27-24 0951ET

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