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The U.S. stock market has been soaring through the first half of 2024, propelled by the remarkable growth of major tech giants. The S&P 500 and Dow Jones Industrial Average have repeatedly shattered records, painting a rosy picture for investors. However, as we approach the typically prosperous month of July, a closer examination reveals a more intricate picture.

Historically, July has been the most lucrative month for stock market performance. Since 1928, the S&P 500 has averaged a 1.7% gain and concluded the month higher over 60% of the time. Similarly, the Dow has enjoyed an average monthly increase of 1.4% in July, recording positive returns in nearly 65% of Julys since 1897. This consistent upward trajectory has fueled speculation of a “summer stock rally.”

Yet, as market experts caution, this rally might not live up to its reputation. The Nasdaq Composite, for instance, historically experiences its weakest four months starting in July, averaging a monthly gain of less than 1% since 1971. Even the Russell 2000, which has seen seven consecutive years of growth in July, only averages a 0.3% return during this month, making it the fourth worst month of the year since 1987.

The current market also presents a unique challenge: an increasing divergence between U.S. stocks. This divergence has peaked in June, with the Dow and Nasdaq moving in opposite directions for eight out of the last ten trading days. “This is the most pronounced rally we’ve seen in a while in terms of price moving higher with underwhelming breadth below the surface,” notes a seasoned technical strategist.

The recent rally, primarily fueled by tech stocks, has left a significant portion of the S&P 500 stocks lagging. This scenario could potentially lead to a pause, or even a pullback, in the summer rally. While this divergence could typically result in either a minor correction or a bear market, some market professionals believe that the current situation isn’t significantly damaging the long-term stock trend. They point to the fact that many stocks, while below their 20-day moving average, are still above their 200-day moving average, indicating an ongoing bullish uptrend.

Investors are advised to interpret seasonality within the context of current market conditions. Despite historical trends, the current divergence and the concentration of gains in tech stocks suggest a more complex and potentially volatile landscape. As the market edges higher, with mixed signals from the Nasdaq, Dow, and S&P 500, investors are reminded to approach the summer months with cautious optimism, ready to adapt to the ever-shifting currents of the stock market.