Doesn’t the market always rally in the summer?  

Many are used to seeing that summer rally start around Memorial Day and finish up around Labor Day.  Appears that is not the case this year (so far), or was it just early, or will it be late?  Second quarter earnings season is in high gear now, by and large it’s been positive.  Coming off a very rough Q1 which saw GDP negative for the first time since Q4 2012 (due to Hurricane Sandy) it appears businesses have shaken off the weather and are growing again, continuing the solid trends from 2013.  

But we know the stock market is a discounting mechanism, and perhaps the good results are baked in.  After all, from Feb 1 through June 30 the SPX 500 was up a blistering 12.7%, the Nasdaq up the same and the Dow Industrials up a bit smaller amount.  Coming off the rough economic data in Q1 it seems the rebound is for real, in fact Q2 advanced GDP came in strong at 4%.  Yet, markets have been on a ‘ho hum’ ride since summer started.  Maybe the weather is just too hot for stocks?

One key indicator we look to often is the VIX, or volatility index.  This current reading may be the key to explaining the lack of a rally.  First, we must understand the historical norm of the VIX is about 20.  It is currently around 14, and had been much lower as of late.  A low VIX indicates complacency, which concern some as we don’t have much fear to make stocks rise (wall of worry).  However, we have other sentiment indicators that are flashing bearish signs, and these are normally contrarian indicators, not trend indicators.  In July markets are flat to down, volume trends are down and interest seems to have waned.

So, we have a dilemma – some stocks are moving higher, but the markets are going sideways to lower and are not rallying as we would expect for this time of year.  As discussed earlier, earnings are driving the action in this stock picker’s market.  This is how a Twitter can climb 20% the same day Buffalo Wild Wings gets slammed 13%.  At some point the indices will get on board with stocks – we’ll have to see if that happens before Labor Day.    

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Bob Lang has been managing private options trading accounts for clients since 2004 and providing subscribers with guidance on trading options for income at Explosive Options since 2011.