Mid-Month and Stock Portfolio Updates: Best of July Over & Defense Offers Second Opportunity
By: Christopher Mistal
July 16, 2020
NASDAQ’s mid-year rally came to an end on Tuesday, July 14. During the rally’s 12-day stretch beginning on the third to last day of June through the ninth trading day in July, NASDAQ gained 4.7%. This is well above its average performance since 1985 but less than half of its best showing from 1999. At NASDAQ’s high close during the rally on July 10 it was up 6.0%. Historically around this time in July is when the market has begun to weaken as NASDAQ’s full-month average performance is just 0.9% since 1985.
[NASDAQ Mid-Year Rally Table]
In the following chart, July’s seasonal pattern over the last 21 years has been plotted with July 2020, plotted on the right axis for comparison through yesterday’s close. This July’s well above average performance so far called for a second, larger range in order to aid in the comparison. Over the last 21 years the market’s trend has been lower beginning right around mid-month through the close. DJIA, S&P 500, NASDAQ, Russell 1000 & 2000 have on average given back some or all of their first half of July gains.
[July 21-Year Seasonal Pattern Chart]
Aside from historical, seasonal data; valuations, sentiment and a lack of guidance from companies this second quarter earnings season are a few possible catalysts that could lead to some near-term market weakness. According to estimates from our friend Sam Stovall of CFRA, the S&P 500 is currently trading around 24.6 times its next 12-month earnings estimates, which is a premium of 49% to its 20-year average. Even if estimates are on the conservative side, there certainly appears to be a fair amount of optimism and hope built into current valuations leaving little room for mistake or error.
Bullish sentiment is also rather elevated now suggesting the majority that wants to own stocks likely already do. There may be massive piles of cash on the sidelines but that doesn’t mean its owners want to put it all into the market. The first notable data point at a worrisome (or at least at cautionary) level is Investors Intelligence Advisors Sentiment survey showing a +40.0% spread between the number of bulls and bears. In their own words, “Above +30% counts show more risk the higher they get, with defensive measures appropriate above 40%.” The second was last week’s CBOE Weekly Put/Call ratio at 0.44. At the start of June it reached 0.43 and in the following week S&P 500 dropped 4.8%. 
Historically the worst two months of the year for the market, August and September, are just a few weeks away. Covid-19 is still spreading and many localities are slowing or reversing re-opening plans. Vaccine development is advancing, but that too could only lead to further uncertainty as the “stay-at-home” trade that has buoyed many tech stocks could also come to a rapid end. The worst is likely over but that does not rule out the possibility of a pullback, correction or at least a pause in the rally sometime between now and Election Day. The exceptional market performance in the second quarter is not likely to be repeated in the third quarter. NASDAQ’s Q2 gain of 30.6% this year was its second-best quarter ever. Its best quarter was Q4 of 1999, up 48.2%
Stock Portfolio Updates
Over the last five weeks through yesterday’s close, S&P 500 climbed a modest 1.1% and Russell 2000 edged 0.7% higher. During the same time period the portfolio slipped 2.2% excluding dividends and any trading fees. Overall performance lagged the broader indexes due to being rather concentrated in generally defensive positions (shaded in grey in the table below) –  specifically a sizable number of utilities. After selling off throughout much of June, utilities have begun to show new life in July and the sector is enjoyed a nice move today. 
Weakness was widespread across all three market-cap ranges in the portfolio. Large caps were worst, off 7.8% as numerous positions gave up previous gains. Duke Energy (DUK) is one example that was up 5.6% last update and has slipped to down 5.8% at yesterday’s close. Consolidated Edison (ED) was modestly lower last update and was stopped out on June 23 for a 14.9% loss. Energy stocks, BP plc (BP), Exxon Mobile (XOM) and Total S.A. (TOT) also lost ground this past month giving up approximately half of their respective gains or in the case of BP all over the last five weeks. 
Bright spots in the large cap portfolio include Regeneron (REGN), ZTO Express (ZTO) and Abbott Labs (ABT). All three positions continued higher over the last five weeks. REGN is still the top performing position in the entire portfolio, up 105.1% since last October after selling half of the original position when it doubled on May 29. REGN and ABT are both in the fight against covid-19. ABT is contributing to the testing and detection of the virus while REGN has developed and is testing REGN-COV2, a novel anti-viral antibody cocktail. ZTO is an express delivery company in China where they just reported better than expected second quarter growth.
Our mid-cap stocks, two of which are utilities, also struggled over the last month. Due to a sizable cash balance the decline was limited to 2.2%. Algonquin Power (AQN) and One Gas Inc (OGS) are now below their respective original purchase prices. AQN and OGS can be considered for purchase near current levels up to their buy limits. JetBlue Airways (JBLU) also surrendered a sizable portion of last update’s gains but is still hanging onto a 35.1% advance since addition. JBLU is on Hold. This was a highly speculative trade idea based upon the notion that JBLU could and would survive a protracted and severe contraction in air travel.
Lastly are the small caps, three financial stocks and a homebuilder. KB Home (KBH) has retreated from its recent highs but has held up well as mortgage rates remain at or near record lows. KBH is on Hold. Real estate could face some weakness as federal support for unemployment benefits nears its currently scheduled end and as many mortgage and rent forbearance programs and protections wind down while millions are still unemployed. For nearly the same reasons, Atlantic Union Bankshares Corp (AUB), WSFS Financial Corp (WSFS) and South State Corp (SSB) are on Hold. Some mega banks have managed to best earnings expectations through the assistance of trading while others have not. It is likely regional banks will experience a similar mixed earnings season as each region has its own unique battle with covid-19.
Many of the defensive positions in the portfolio can again be considered on dips below their buy limits. Please see table below for specific buy limits, stop losses and current advice.
[Almanac Investor Stock Portfolio Table]