Rev's Forum: Here's the Deal With the Mythical Summer Rally

 | Aug 07, 2017 | 7:42 AM EDT
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"The first week of August is motionless and hot. It is curiously silent, too, with blank white dawns and glaring noons, and sunsets smeared with too much color. Often at night there is lightning, but it quivers all alone. There is no thunder, no relieving rain. These are strange and breathless days, the dog days, when people are led to do things they are sure to be sorry for after."

-- Natalie Babbitt

One of the many myths that exist in the stock market is that there tends to be a major rally at some point during the summer. There are summer rallies, but they are no more common than at any other time of the year. In fact, the summer months are generally the weakest time of the year seasonally, which may make positive action stand out.

Presently, we are mired in typical dull summer trading. It is actually duller than usual, as the S&P 500 has closed in an extremely tight range for almost three weeks now. There was a little better movement in the Nasdaq 100 ETF (QQQ) , but that was mainly due to reaction to earnings from some big-cap names like Action Alerts PLUS charity portfolio holdings Apple (AAPL)  and Alphabet (GOOGL) , Tesla (TSLA) , etc.

The only thing that is going on in this market right now is there are some big moves on earnings. There are some big movers, like Arista Networks (ANET) and then some ugly blowups like Applied Optoelectronics (AAOI) , which had been the number one stock in the number one momentum sector. Without the earnings moves, the market action would be comatose.

On the positive side of the ledger, the bears are still unable to do much, although there is plenty of evidence that valuations are stretched and central banks are less friendly. The lack of progress on the Trump fiscal agenda is also being ignored. The list of potential negatives is quite long and there are more and more big players looking for a day or reckoning soon, but there continues to be enough technical support to prevent the bears from gaining any traction. The market is ignoring the negative arguments, just like it has for many years.

The biggest negative in the market right now is the lack of trading setups. Earnings have not produced much opportunity. It has been feast or famine if held into reports, and there has been limited follow-through to the upside on good reports.

Outside of earnings, there is almost no action right now. Volatility continues to run at very low levels and the pockets of opportunity that I'm constantly looking for are nearly nonexistent. It isn't a bad market from the standpoint of the indices, especially the DJIA, which is receiving so much media attention, but the overall action is generally poorer than what the indices indicate.

Unfortunately, I believe it is likely that this very dull action is going to continue for a while. Probably the easiest mistake to make in this environment is to let the desire for action push you to be more anticipatory. There is an old saying that the longer the base, the bigger the move when there is a breakout, but this market keeps setting records for trading in tight ranges. Last August, the market traded nearly flat for three weeks and at the rate things are going, we may break that record.

It is extremely dull out there. My game plan is to cultivate patience and to keep looking for opportunities. I see no reason to make any big market calls right now. When the price action shifts, then I will react. We can't let boredom influence our market bias.

We have a flat open on the way.

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