Could an August surprise be in the cards? August is typically lousy for stocks — it's the worst month for the S&P 500 since 1987, according to the Stock Trader's Almanac.
The bulls are hoping they can confound all expectations and pull out another monthly advance. The hope is that the market will continue to do what it has done all year: Technology will continue to be the leader, and even if a modest profit taking occurs after Apple's strong numbers, the market pattern will hold and weaker sectors will rotate to the forefront.
The two key rotation candidates are energy and financials.
Can this plan work? There are some signs this is already happening...
1) The key for energy to start moving is to get oil consistently over $50. After being stuck in the $42-$45-a-barrel range for several months, oil is now trading in a regular $45-$50 channel, but only rose over $50 on Monday. Regardless, stocks like Chevron, EOG Resources and Schlumberger have all moved up since oil begun moving toward $50 in early July.
(since July 7)
Transocean: up 9.6 percent
Chevron: up 7.2 percent
Schlumberger up 6.4 percent
EOG: up 4.8 percent
2) The key to getting financials going is to get a modest breakout in short-term rates (banks hit their recent highs in early July when 2-year yields briefly broke over 1.4 percent) and get the Trump administration talking about deregulation expansion. Expectations for a modest rise in rates have already begun to move large regional banks since earnings season ended in mid-July.
(since July 17)
3) Finally, there are several losing sub-sectors that are starting to show signs of life and may also provide new leadership in August, including telecom and some retail that got beaten up badly on Amazon.
So, what are the chances of an August surprise? For Art Cashin of UBS, it could work, but "the surprise would have to come from Washington," he told me.
A notable rally in oil stocks? A lot of money has been lost chasing an energy stocks rally this year. The chances are at least as great that oil will end the year at $45 or lower than it will at $55 or so. Call that a tossup.
Same with financials. We're not getting much in terms of regulatory changes, the Fed may not even raise rates in December and loan growth is still pretty modest.
"I don't know how much more rotation there can be in financials ... everyone seems fully invested," Jack Micenko, bank analyst at Susquehanna, told me.
He noted that the biggest gains in Financials came immediately after the election. "I don't see financials as a source for new money," he said, "at least for the moment."
Any moves on the major issues — loan growth, interest rates and regulatory changes — would cause him to alter his opinion, but the logjam in Washington — and the runup in banks around regulatory reform — very much worry him.
"At some point, something is going to rattle the markets around the lack of progress in Washington," he said.
My take? The momentum remains on the side of the bulls, who have been right all year. The global economic expansion and the great earnings picture are what's moving stocks, and I'm not abandoning that as the central thesis.