Mid-Year Rally Expected - What Does History Tell Us Now?

The market continued to advance Friday, although the gains were limited. The follow through has pushed our indicators into extreme territory, particularly in the higher-beta indices such as the Nasdaq 100 (QQQQ). There could be a decent short-term (1-3 days) fade opportunity this week and now the probability looks very favorable for such a move to come to fruition. However, as I stated in my last post, I would tread lightly. The major indices are all at an important juncture as they have managed to push slightly above what has been strong overhead resistance. A move below these levels could stir up the bears and cause a wave of selling, but how long the selling lasts is another question. Being a short-term bear (1-2 days) has been essential in this market as every dip has led to higher highs.

July is historically the best month for the NASDAQ. The start of the second half brings in retirement funds, etc. Furthermore, the NASDAQ's 12-day mid-year rally begins in late June and conveniently ends, hmmm on July 13th this year. According to the Stock Trader's Almanac the average gain for the 12-day mid-year tech rally is 3.2% versus the 0.1% for versus 0.1% for July as a whole. Moreover, the Almanac states to watch for "huge market gyrations" after July 4th "both up and down". The Almanac goes on to state that " in the mid-80's the market began to evolve into a tech driven market and control in summer shifted to the outlook for the second quarter earnings of technology companies."

This year the 12-day rally began on June 12th and as I stated earlier, ended Friday. QQQQ, the proxy for the NASDAQ 100 opened up at $47.52 on the 28th and ended the 12-day mid-year rally Friday at $49.90, for a gain of 5.0%. So, if the historical precedence remains true then the market should begin a major slowdown, at least for a few weeks. So do not get to excited by the talking heads on CNBC or anyone else touting the recent gains in the market as sustainable. Just look at the historical facts. Not once during this rally did I hear a mention of the 12-day mid-year rally that is stated in one of the most prominent texts among trader's, not once!

With that said, I do expect to see the "summer doldrums" once again take over this week and the major benchmarks move back into the trading range that it has established over the last few months. As I have said for months now, expect a trading range with slight expansion. We saw the slight expansion occur this past week, now expect the market to contniue the recent sideways trend.

The strong move has pushed the underlying SPX closer to the short call strike in our Iron Condor strategy, however, we are still comfortably within our range. This goes to show just how powerful this strategy can be because with a 160 point range, the underlying SPX can vacillate wildly and yet the strategy is still profitable. I do think that a dip in the S&P might bring an opportunity to take the position off, so I will look at that when the opportunity presents itself. There is no need to risk testing our short call strike during option expiration week. Even if we take off the trade for say $.20 the strategy will still make over 10% for the July expiration cycle.

Overbought/Oversold levels for July 13, 2007

SPY - 73.8 (overbought)

DIA - 79.7 (overbought)

IWM - 65.0 (neutral)

QQQQ - 84.7 (very overbought)

GLD - 76.1 (overbought)

OIH - 55.7 - (neutral)