By: Steve Sosnick Chief Strategist at Interactive Brokers

Yesterday, we discussed whether the lows that we saw about 10 days ago were “a” bottom or “the” bottom.  Our premise was that we probably have not put in a secular low in equity markets.  That said we acknowledged that seasonal factors such as Thursday’s quarter end and light volume from the first-ever convergence of two early summer holidays[i] could allow markets to experience a solid relief rally. 

Something occurred to me yesterday when I was looking at a chart of the S&P 500 (SPX).  See if you can spot it in the chart below.  I gave some not-so-subtle hints in the form of vertical lines at the end of each of the past few month-ends:
 

SPX 7-Month Chart, Daily Bars, with Vertical Lines at the End of Each Month

(Click on image to enlarge)

Source: Interactive Brokers

With the exception of April/May, we have seen a short-term rally into the end of each month that ended early the next month. That includes the all-time high that was registered on January 4^th.

The pattern seems fairly clear. Sometime late in the month we bounce off the lows, and that bounce continues until the first couple of trading days in the subsequent month. The bounce fails to break the prevailing downtrend that has been in place throughout the year, and we sink back to new lows. Rinse, repeat.

Yes, a few months is hardly a robust statistical sample. I’m quite cognizant of the risks when trying to extrapolate a pattern with only a handful of occurrences. Trust me, I’ve learned that lesson the hard way. But when we find that there is a technical pattern that supports our fundamental assertions, we have to pay attention. 

There are some risks on the horizon. At the end of the shortened July 4^th week we have another payrolls report. If you have any reason to doubt the importance of economic statistics, consider today’s abrupt intraday selloff after poor Conference Board Consumer Confidence and Richmond Fed numbers. The payrolls report speaks directly to the full employment pillar of the Fed’s dual mandate. Beyond that, earnings season begins in the following week. It is quite reasonable to have concerns that the tumultuous economy could be adding significant uncertainty to corporate results and outlooks.

Our remains that a lasting, true bottom would require the Fed and other central banks to move away from their path of tighter monetary policies. That doesn’t require the Fed to step on the proverbial gas pedal – taking their foot of the brake would be sufficient. Remember, the rout in late 2018 ended when the Fed said that it would stop raising rates. But as long as they remain committed to rate hikes and to a quantitative tightening cycle that is only in its infancy, it will be very difficult to assert that the recent bounce is attributable to anything more than a seasonal reaction to oversold conditions.

[i] Last Monday was the first time that US markets closed for the Juneteenth holiday. Coming just two weeks before July 4^th, it gave us two out of three four-day weeks and an opportune time for many to take vacations.