Stock Market Forecast: 2 Reasons to Prepare for a Summertime Pullback

Big Money Index Reaches Rare Overbought Signal

A great way to understand market sentiment is to measure the buying and selling demand in stocks. Our Big Money Index (BMI) has been the analog for the market the past year.

Back in August of 2022 and February of this year, we reached overbought and quickly the S&P 500 (SPY ETF) pulled back. A similar setup is shaping up today:

When you dive below the BMI you’ll see why the market appears due for a healthy pullback. Stock selling has pretty much ground to zero.

Below we see the daily stock buys and sells. Since June, nearly 80% of all signals in our universe have been on the buy-side. The tech-heavy NASDAQ (QQQ ETF) has garnered much of the steam as well as popular sectors like Discretionary (XLY ETF), Semiconductors (SMH ETF), and Technology (XLK ETF):

From a technical perspective, stocks are extended. But there’s another evidence-based reason to expect a pullback.

August and September are Historically Weak Months

Reason number 2 for a Summertime pullback lies in seasonality. Going back to 1990, the S&P 500 falls an average of -.6% in August and -.8% in September.

Low liquidity can lead to market shenanigans:

And while pullbacks are part of investing, there’s a positive side to this story as well. Pullbacks in August and September tend to lead us into a very green time of year: Q4.

October, November and December are incredibly bullish historically with S&P 500 gains of +1.6%, +1.9%, and +1.3% respectively.

This, to me, says to welcome a much needed pullback and use it for what it really is: a great time to add to stocks on sale. We’re in the midst of one of the strongest bull markets in recent years.

The Bottom Line & Explanatory Video

The stock market is due for near-term weakness based on an overbought Big Money Index (BMI) and Summertime seasonality. August-September air pockets are normal and expected.

Use potential weakness as your opportunity to shop for great stocks on sale. The 4^th quarter will be here before you know it, and that’s go-time for markets.

These insights are a truncated view of MAPsignals research which you can learn more here.

Disclosure: As of the time of this writing, the author holds no positions in XLK, SMH, or XLY but holds short positions (hedges) via options in QQQ & SPY in managed accounts.