Stock Portfolio Update: Worst Months Not Over Yet
By: Christopher Mistal
September 12, 2019
In our September Outlook we noted the market would likely work its way higher in the first few weeks of September. The pace has been quick with S&P 500 breaking through resistance around 2950 and then again right around 3000, but momentum appears to be fading short of previous all-time highs. A meaningful improvement in trade and/or a 0.50 interest rate cut by the Fed next week is likely needed to provide the boost the market needs to breakout to new highs. There has been some improvement to the trade outlook, but the odds of 0.50 rate cut from the Fed are nearly zero. In fact, as of today the CME Group’s FedWatch Tool is showing just an 88.8% chance of a quarter point cut.
Next week when the Fed meets is also quarterly options expiration. Overall next week does have a bullish record with S&P 500 recording an average gain of 0.28% during the week since 1990 with twenty weekly advances in twenty-nine years. But the week after and the end of the third quarter have the exact opposite record, actually even worse. Since 1990, S&P 500 has fallen twenty-three times during the week after options expiration and the average loss has been a sizable 0.95%.
The market is likely to make a run at new highs, it just may not spend much time there before retreating again. We will continue to maintain a defensive posture until our Seasonal MACD Buy Signal triggers sometime on or after October 1.
Stock Portfolio Updates
In the time since last update through yesterday’s close the Almanac Investor Stock Portfolio climbed 1.7% higher compared to a 4.1% gain by S&P 500 and a 5.0% gain from the Russell 2000. A sizable cash balance buffered the portfolio’s return. The portfolio also declined less in August compared to S&P 500 or Russell 2000 so the rebound has not been as large. Large-cap holdings, the majority of the portfolio, performed best, up 3.8%. Mid-cap holdings rose 1.3% on average. The small-cap portion of the portfolio currently does not hold any positions, but we anticipate adding new positions soon, most likely in late October as that time of the year has historically been a better time to do so.
Tariff and interest rate concerns that sank the market in August have abated, somewhat. Both China and the U.S. have toned down threatening rhetoric and appear to be looking for a resolution sooner rather than later. Interest rates have also risen off of recent lows suggesting an improvement in growth expectations and possibly an easing in recession fears. However, even with these improvements in the macro environment, traders and investors have continued to keep a close eye on corporate earnings and guidance.
Verint Systems (VRNT) reported earnings that did not quite meet expectations earlier this month. The result was a one-day drop of nearly 14% on September 5. On that day VRNT closed below its stop loss and was closed out of the portfolio the next day using its average price on the day. Lennox International (LII) was also recently stopped out. It has been in a slow and steady trend lower since reporting tepid earnings in July. 
UnitedHealth Group (UNH) was a long-time holding in the portfolio that was added again in June as a defensive, dividend trade. UNH has solid earnings and growth, but apparently the talk about Medicare for all is weighing on the stock. UNH was stopped out of the portfolio in late-August and has been closed out with a modest loss.
This year’s defensive basket of stocks from June are currently up an average 6.3% including stopped out positions. Three positions were stopped out and four ran away and were not added to the portfolio, but the others have performed. Bayer (BAYRY) is the best, up 23.6% at yesterday’s close. AT&T (T) is second best with a 22.6% gain followed by a 21.1% gain by Pattern Energy (PEGI). Terraform Power (TERP), Southwest Gas (SWX) and Alliant Energy (LNT) all ran away and these trades are cancelled.
All positions held in the portfolio are on Hold. So far September has been kind to the market, but headwinds still exist and the “Worst Months” are still in progress. Continue to limit new buying. See table below for updated stop losses.
[Almanac Investor Stock Portfolio Table – September 11, 2019 Closes]