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What to expect from stock prices this summer

Fiala Petr
Published: 13.7.2014 | Last modification: 14.7.2014 05:24  | Comments: none
I have prepared a few charts that might be helpfull in understanding of current conditions on markets.

I start with  charts showing a typical seasonality.

Figure: A typical development in the final years of previous BULL markets. This seasonal chart shows that if 2014 year is to be similar in the development as those two years, then the important top should  occur within a next few days. I do not suggest that a new BEAR market is going to start right now, however I see a possibility of summer correction as high.  

Figure 2: Seasonality - typical year ( red), presidential cycle ( green and blue) - we are entering a bad period of the year from the point of stocks seasonality. All three seasonal curves turn down in the second half of July. A typical bottom occurs in October.

Figure 3: FED operations and activity of primary dealers - you can see that the activity of banks is declining. That is the opposite what one would expect if the stock market is to go up. This is rather bearish. This tells me that banks expect some worse period for stocks. 

Figure 4: This chart shows activity of banks in the upper graph panel. This indicator is derived from the FED open market operations. There is a big decline of the indicator. Primary dealers of the FED turn bearish on stocks. The second and third graph panels show LONG and SHORT positions of commercials ( banks) for DJIA and Nasdaq 100 futures contracts. I see slightly bearish development at DJIA, however banks remain LONG Nasdaq 100 contract.  

What I see as positive

I think that markets outside USA are in much better shape for the summer months ( except European stocks). Valuations are not so high as are the ones on the U.S. markets. That is probably why there is strong accumulation of Latin American stocks in current months.  

Figure 5: Seasonality is favorable for Latin American stocks . There might be a bad time from 2014/08/21 to 2014/09/07 however the overall trend is UP unlike a typical seasonality of the U.S. stocks. 

Figure 6: EWJ - Japan ETF - this charts looks positive. I think that finally EWJ is going to go UP above the resistance of $12.30.

My favorites are from Latin American markets. I prefer stocks with low P/E, good growth parameters, positive ROE and ROA and decent dividend.

Figure 7: This stock has a long-term potential. It belongs to a defensive sector and that is also an advantage in today´s  environment . 

Figure 8: Another stock from the Argentinian market. I see a growth potential, price might go somewhere to $17-18. 

Summary: U.S. stocks are entering a bad seasonal period of the year. Caution is needed. Emerging markets might be a good alternative to the U.S. markets. Stocks that could outperform U.S. indexes: TEO, BFR, CIG, BMA, EDN. Other markets that could attract investors: India, Russia, Japan. Which sector could perform well in the USA: Regional banks - ETF KBE.

Petr Fiala

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