What historically happens after stocks soar through July

This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:

Stocks tumbled Thursday, with the Dow Jones Industrial Average (^DJI) sinking the most in three weeks — dashing hopes of a nearly-unprecedented streak of 14 straight winning days.

Notwithstanding the short-term weakness, July is nearly in the books and is set for a fifth straight month of gains in both the Nasdaq Composite (^IXIC) and the S&P 500 (^GSPC).

In addition to being up six out of the seven months this year, returns are unusually high — 34% for the Nasdaq and 18% for the S&P 500.

Filtering for these variables reveals an incredibly bullish tailwind for the U.S. benchmark equities index.

Looking at the six prior times the S&P 500 was up five straight months in July, the return for the balance of the year was 8% on average with a 100% win rate.

Broadening out the analysis to include only those years when the January through July returns were 10% or more yields a more robust sample size of 21 going back to 1960.

These years return on average 4.8% from August to December with 95% of the results positive. (The only negative return was 1987, famous for its Black Monday crash in October.)

Stocks Up 10% or More Through July

Stocks Up 10% or More Through July

Looking at big starts for the Nasdaq reveals a similar story, but a bit less bullish.

In 26 years going back to 1971, when returns were more than 10% by the end of July, the average return into year-end was 6.3% with positive results nearly 70% of the time.

Last Friday — way back when the Dow win streak was only 10 days — we looked at forward returns after such a feat. The results were positive two-thirds of the time with a few outliers that brought down the average.

Insert your boilerplate caveats here. There are no guarantees, only tendencies.

But the bottom line is — no matter how you slice and dice it, market technicals are screaming to investors that they should respect the strength demonstrated so far this year.

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