July’s Big Rally Could Continue, But Consider The Risks 

After the first two weeks of July, you might have looked at the stock market and all the averages struggling to stay positive for the month and then shaken your head in dismay.

Inflation news was lousy. The Federal Reserve was poised to raise rates perhaps a full percentage point. There was talk of recession. The news from Ukraine was horrifying. The housing market was slowing markedly. Prices on cryptocurrencies had slumped for months, and the crypto ecosystem looked unstable.

Then, despite all that bad news, stocks took off in the last two weeks of the month, producing the best gains for the major averages since 2020. Crypto rebounded, too.

It is possible the rally will continue. The question is, for how long?

The S&P 500 Index finished July up 9.1%, and the Dow Jones Industrial Average added 6.7%—the best performances for both indexes since November 2020. The NASDAQ Composite Index added 12.4%, and its sibling, the NASDAQ 100 Index, jumped 12.6%. Their gains were their best since April 2020.

Cryptocurrencies, which tend to track the NASDAQ, were up, too. Bitcoin was up nearly 30% for the month—after falling 41% in June.

The buying, especially last week, was frantic, especially after earnings reports and guidance from Apple (NASDAQ:AAPL), Exxon Mobil (NYSE:XOM), and Amazon.com (NASDAQ:AMZN) were better than expected. Amazon’s gains came despite writing down $3.9 billion of its investment in electric-truck maker Rivian Automotive (NASDAQ:RIVN). (Rivian shares are now 56% below their $78 IPO price from November.)

Exxon and other oil companies are still enjoying huge profits with crude oil hovering around $100.

We’ll let the S&P 500 show how frenzied the July buying was. A total of 443 S&P 500 stocks showed gains for the month, up from 57 in June.

Of the 443 July winners, 217 had gains greater than 10%. The last time that happened was November 2020, according to Howard Silverblatt, S&P Dow Jones’ senior index analyst.

In June 2022, just one S&P 500 stock gained 10% or more, Dollar General (NYSE:DG), up 11.4%. (It was up 1.22% in July.)

Another snapshot: The top S&P 500 stock in July was Enphase Energy (NASDAQ:ENPH), which makes solar-energy products aimed at the residential market. Enphase jumped 45.6% in the month and is up 55% for the year. It was also the only top-10 performer in June to be a top-10 performer in July.

Bath & Body Works (NYSE:BBWI), which retails home fragrance, body care, and soaps, was the sixth-best S&P performer for the month, up 32% but still down 49.1% for the year. The stock is down that much because it was the third worst S&P 500 performer in June, down 34.4%.

Markets, especially stock markets, are seeing lots of volatility everywhere. What investors are not seeing is consistent performance. That’s why many investors are skeptical that July’s gains might be the start of something big.

Despite the July rally, the S&P 500 is still down 13.3% for 2022. The Dow is off 9.6%, with the NASDAQ down 20.8%, still in bear-market territory.

The German DAX Index is still down 15.1%, even after a 5.5% July gain. The German economy has been reeling from soaring energy and food costs, courtesy of the Ukraine-Russia war. China’s Shanghai Composite Index fell 4.3% in July and is off 10.6% for the year, in part reflecting China’s struggles to control COVID-19.

The volatility is fueled by four forces and the residual effects of COVID-19.

• The Federal Reserve is boosting interest rates to bleed inflation out of the U.S. economy. After the Fed raised its key interest rate to 2.25% to 2.5% last week, Chairman Jerome Powell warned that “unusually large” rate increases may still be ahead. But investors bought stocks like crazy because they see the Fed easing back by early next year. The 10-year Treasury yield fell 5% on the week to 2.64%. It reached nearly 3.5% in mid-June.
• Inflation: Higher oil, general consumer prices, and continued global supply-chain problems are bedeviling consumers. Add to that high housing costs. But it may be easing despite the Fed and the central banks. West Texas Intermediate crude oil, at $98.62 a barrel on Friday, is up 31.1% for the year, though it fell 4.3% in July. According to American Automobile Association data, retail gasoline averaged $4.255 a gallon on Friday, up 29.5% for the year. But that’s down 15.2% from the June 16 peak of $5.016 a gallon.
• The strong dollar: The dollar is up 10.6% against major currencies—a trend related both to inflation and the Fed. The dollar’s strength has hit many countries hard, if only because crude oil is priced in dollars or because they struggle to produce the cash to buy U.S. goods and services.
• The Ukraine-Russia war: The war has disrupted global food supply chains because the two countries are major exporters of wheat and other farm commodities. And, of course, the potential that the conflict could widen is a major concern.

In addition, markets are being buffeted by computers programmed to track technical indicators such as MACD levels.

The NASDAQ 100 started to gather strength when its MACD started to signal near-term strengthening in mid-to-late June. The Russell 2000 Index and the S&P 500 started to show similar conditions a week or so later, setting the primer for the rally. All it needed was some decent earnings and optimistic guidance, which came in last week’s reports.

Right now, MACD and other technical measures suggest stocks should continue to move higher, possibly through August.

But there’s a risk. If the rally continues to be very strong, the stock market could become overbought and tip over. The relative strength indexes for the Dow, S&P 500, and NASDAQ are now in the middle-60s. RSI is a momentum measure that signals if a stock or index is moving too quickly to the upside or the downside. If the RSI levels head into the mid-70s or higher, one could see some sudden pullbacks.

The last time this happened was in November when RSIs for the NASDAQ, S&P 500, and Dow all moved into the 70s. The selling came right after the new year as the Fed started pressuring markets to be ready for higher rates.

So be careful.

A quick look at how the rally unfolded.

Winners And Losers

The top sectors in July were

• Consumer discretionary stocks, up 18.9%. These include Amazon, Lowe’s (NYSE:LOW), Chipotle Mexican Grill (NYSE:CMG), and homebuilder Lennar (NYSE:LEN).
• Technology stocks, up 13.5%. These include Apple, Advanced Micro Devices (NASDAQ:AMD), Nvidia (NASDAQ:NVDA), Microsoft (NASDAQ:MSFT), and Texas Instruments (NASDAQ:TXN).
• Energy stocks, up 9.6%. These include ExxonMobil, Chevron (NYSE:CVX), APA Corporation (NASDAQ:APA), and Halliburton (NYSE:HAL).

The laggards were:

• Communications Services, up 3.5%. These include Google parent Alphabet (NASDAQ:GOOGL), Facebook parent Meta Platforms (NASDAQ:META), Walt Disney (NYSE:DIS), Twitter (NYSE:TWTR), and News Corp. (NASDAQ:NWSA)
• Health Care, up 3.2%. These include UnitedHealth Group (NYSE:UNH), Amgen (NASDAQ:AMGN), Johnson & Johnson (NYSE:JNJ), Merck (NYSE:MRK), and Pfizer (NYSE:PFE).
• Consumer staples, up 3.1%. These include Costco Wholesale (NASDAQ:COST), Coca-Cola (NYSE:KO), Kroger (NYSE:KR), and Walmart (NYSE:WMT)

Top 10 S&P 500 Stocks In July

(July, YTD)

• Enphase Energy (NASDAQ:ENPH) 45.55%, 55.34%
• Etsy (NASDAQ:ETSY) 41.67%, -52.63%
• United Rentals (NYSE:URI) 2.84%, -2.90%
• ON Semiconductor (NASDAQ:ON) 32.74%, -1.68%
• Tesla (NASDAQ:TSLA) 32.38%, -15.64%
• Bath & Body Works 32.02%, -49.08%
• Ford Motor (NYSE:F) 31.99%, -29.27%
• SolarEdge Technologies (NASDAQ:SEDG) 31.59%, 28.36%
• Nucor (NYSE:NUE) 30.06%, 18.97%
• Netflix (NASDAQ:NFLX) 28.61%, 62.67%

Worst S&P 500 Stocks In July

(July, YTD)

• Newmont Goldcorp (NYSE:NEM) -24.12%, -26.99%
• Cincinnati Financial (NASDAQ:CINF) -18.19%, -14.56%
• Baker Hughes (NASDAQ:BKR) -11.01%, 6.77%
• AT&T (NYSE:T) -10.40%, -23.66%
• Verizon Communications (NYSE:VZ) -8.99%, -11.10%
• Baxter International (NYSE:BAX) -8.67%, -31.66%
• WR Berkley (NYSE:WRB) -8.39%, 13.84%
• Charter Communications (NASDAQ:CHTR) -7.78%, -33.72%
• Allstate (NYSE:ALL) -7.70%, -0.58%
• Viatris (NASDAQ:VTRS) -7.45%, -28.38%

Top 5 Dow Stocks In July

(July, YTD)

• Apple 18.86%, -8.48%
• Boeing (NYSE:BA) 16.52%, -20.87%
• Chevron 13.12%, 39.57%
• Nike (NYSE:NKE) 12.45%, -31.05%
• Walt Disney 12.39%, -31.50%

Worst 5 Dow Stocks In July

(July, YTD)

• Verizon Communications (NYSE:VZ) -8.99%, -11.10%
• IBM (NYSE:IBM) -7.37%, -2.15%
• Travelers Companies (NYSE:TRV) -6.17%, 1.45%
• Procter & Gamble (NYSE:PG) -3.39%, -15.08%
• Intel (NASDAQ:INTC) -2.94%, -29.50%

Top 10 NASDAQ-100 Stocks In July

(July, YTD)

• Tesla 32.38%, -15.64%
• Netflix 28.61%, -62.67%
• Marvell (NASDAQ:MRVL) 27.91%, -36.36%
• MercadoLibre (NASDAQ:MELI) 27.77%, -39.65%
• Amazon.com 27.06%, -19.06%
• Autodesk (NASDAQ:ADSK) 25.80%, -23.07%
• Airbnb (NASDAQ:ABNB) 24.58%, -33.34%
• NXP Semiconductors (NASDAQ:NXPI) 24.22%, -19.27%
• Cadence Design Systems (NASDAQ:CDNS) 24.03%, -0.14%
• PayPal Holdings (NASDAQ:PYPL) 23.90%, -54.11%

Worst NASDAQ-100 Stocks In July

(July, YTD)

• Pinduoduo (NASDAQ:PDD) -20.70%, -15.93%
• Baidu (NASDAQ:BIDU) -8.18%, -8.21%
• Charter Communications (NASDAQ:CHTR) -7.78%, -33.72%
• JD.COM (NASDAQ:JD) -7.35%, -15.08%
• Comcast (NASDAQ:CMCSA) -4.38%, -25.45%
• Zoom Video Communications (NASDAQ:ZM) -3.81%, -43.53%
• Kraft Heinz (NASDAQ:KHC) -3.43%, 2.59%
• Gilead Sciences (NASDAQ:GILD) -3.33%, -17.71%
• Intel -2.94%, -29.50%
• Regeneron Pharma (NASDAQ:REGN) -1.60%, -7.89%

Disclosure: The author does not own any of the securities mentioned in this article.

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