MARKETS

The stock market’s strong performance last month has MoneyShow’s Tom Aspray examining the technical evidence to see whether it can stay strong as we head deeper into the summer doldrums.

July was a great month for stocks with the Dow Industrials up 4%, the S&P 500 gained 4.9%, and the Nasdaq Composite was up 6.6%. The small-cap Russell 2000 was the leader, gaining 6.9%.

In mid-July, flows into stock funds hit a six-month high at $19.7 billion but there still seems to be some debate as to whether the long-awaited rotation from bonds to stocks is underway. The data is mixed as the record flows into stock funds were accompanied by $4 billion flowing into high-yield junk bond funds.

The public participation in stocks is still at historically low levels, and many are wondering after July’s stellar performance, if August will be as good.

The technical evidence last December suggested the market could see double-digit gains in 2013. With the stock market’s sharp gains, so far this year, the odds for a double-digit year have improved even though we still have five months left in the year.

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Since 1993, there have been ten years when the S&P 500 had double-digit gains. In only four years did the gains exceed 20%, with the best return being a 34.1% gain in 1995. In examining these strong years, I then started to look at how the S&P 500 did in August in each of those years.

Of these years, the S&P had its worst August in 1998 as it was down 14.6%. The chart shows that in August, the S&P 500 traded in a range for most of the month before plunging the last three days. Still the S&P 500 was up 26.7% for the year.

In 2010, the S&P 500 was up 12.8% for the year but it had the third-worst August since 1993. That year, stocks traded higher for the first seven days of August before prices plunged as the S&P 500 finished 5.2% lower. As the chart indicates, the August decline held well above the July 2010 lows.

Since 1950, August has generally been a flat month for stocks as they were up 36 years and down 27 years. In fact, 1998 was the only year that saw a double-digit loss. I do not expect August to match July’s performance and a flat month for the averages would not be too bad; a 3-5% decline is more likely.

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Clearly stocks have been the place to be in 2013 with the Spyder Trust (SPY) up 19.6% and the German Dax Index (not shown) up close to 8%. The weakest performer is still gold as the SPDR Gold trust (GLD) is still down 21.7% despite its recent rally.

The cut in the dividend of Barrick Gold (ABX) will put more pressure on the beaten-down gold miners. The rebound in gold still looks to me like a bull trap as the OBV has already broken down and is likely leading prices lower. A close in GLD below $124 should be enough to signal another wave of selling.

Bonds, as represented by the iShares Barclays 20+ Year Treasury Bond (TLT) are down 12.3%, so far in 2013, while the Vanguard FTSE Emerging Markets ETF (VWO) did only slightly better losing 10.4%.

Last week, I noted the improved performance of some of the stock markets in the Eurozone, with France and Germany leading the way. Now, even Spain has moved into positive territory for the year.

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This positive action is now being confirmed by data on consumer confidence out of the region. As the graph above indicates Spain’s economic-sentiment index has risen to 93.5, which is the highest level since early 2012. It is even better than the Euro region as a whole where the index is at 92.5.

France and Italy have also risen sharply, and in a separate report, the consumer sentiment in Germany rose to a six-year high. Between now and the German election in September, there is likely to be more news out of the Eurozone but there has been definite improvement in the economic trend.

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Tickers Mentioned: Tickers: SPY, DIA, QQQ, IWM, IYT