July Seasonal Strength May Give Great Trades -- So Get Ready Now

NEW YORK (TheStreet) -- July is here, and trading activity should die down as money managers go on vacation after their late-June portfolio rebalancing. That leaves us with the typical July market: there is usually lots of bullish action in momentum and speculative names.

Despite the possibility that the averages may not do much, I have mostly had great success in the seasonally strong period, starting around July 4 and ending around mid to late July. Afterwards the markets typically quiet down during the August doldrums through Labor Day.

Let's look at the Marty Zweig model for how to profit on this seasonal shift.

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The Martin Zweig Model Would Probably Still Be Cautiously Bullish

The conditions for higher prices in the short run remain bullish unless further shocks like war, rising oil prices, etc., shake things up.

Marty Zweig was, in many people's view, the greatest market prognosticator of them all. If Zweig were still alive today, I believe he would say that the odds favor the bulls.

Zweig's stock market model was comprised of three components. Right now two out three of those components are bullish. I list them in order of importance in the model's weighting.

1. Federal Reserve policy, which is still simulative, despite the tapering.

Zweig famously coined the term "don't fight the Fed." Score one for the bulls -- although the quantitative easing policy was not in play during Zweig's day.

The true test of a potential change in monetary policy will come in the fall, when the taper ends and the Fed must decide whether to perform another round of QE or not. Until then, and unless Janet Yellen says something about Fed tightening, monetary policy is still bullish.

2. Market momentum, which is clearly bullish.

The market has been over its 200-day moving average for a record 402 days. Pullbacks over 5% are rare, and stocks are resiliently grinding higher.

3. Market sentiment, which is terrible -- it's at historically euphoric levels.

From the put/call ratio, which Zweig invented, to historically low bull/bear ratios, things are too giddy. Thus this looks bearish.

Milton Friedman Would Say Long Term Risks Abound

The thought of making money in an extended mature market during such precarious economic times sounds crazy.

In my last article, I posited that the monetary policy of the world's central bankers is producing poor, sputtering economic recoveries. Worse yet, inflation is starting appear.

Nobel Laureate and economist Milton Friedman stated that the growth of the monetary base must be close to the historic growth of the economy and we always pay a high price for any aberrations. In his view, expressed in this speech from his  Free To Choose PBS TV series, too much tightening caused the Great Depression, as the Fed shrunk the monetary base by 30% in the early 1930s. Thus the Fed did exactly the wrong thing at the wrong time.

Now the Fed is doing the extreme opposite, which Friedman also warned against in his speech.

Short-Term Window of Opportunity

Despite the long-term dangers, I am setting price alerts on bullish chart setups and looking to capitalize on what's running. I think that traders may have a short-term window to make money while the cat's away on vacation.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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