What historically happens after stocks soar through July: Morning Brief

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 US 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 instances 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.)

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.