Mid-Month and Stock Portfolio Updates: So Far, Market Blasting Through Seasonal Weakness By: Christopher Mistal | August 13, 2020 | Email | Print

Thus far, the market has not succumbed to typical August weakness. As of yesterday’s close small caps, measured by the Russell 2000 were best, up 6.95% in just eight trading days. DJIA was second best, up 5.86%. Previous technology leadership is currently lagging up just 2.48%. Russell 1000 and S&P 500 were up 3.17% and 3.34% respectively. Compared to their respective average performance at this point in August over the last 21 years, this year is well above average. In fact, at this point in August, all five indexes are typically in the red. Strength during the usually weak first part of August does suggest that more gains are possible.

 

 

However, before moving much higher S&P 500 and then DJIA will need to overcome resistance at previous all-time highs reached back in February. S&P 500 is closest and has traded above its February 19 closing high intra-day in recent trading. DJIA still has 1654.25 points (5.93%) to reach its February 12 closing high. Recent mixed trading has Stochastic and relative strength indicators pointing lower which could cause some buyers to hold back in search of better prices. MACD has yet to turn negative, but it would not take much more softness for that to happen.

 

 

Aside from some modest technical issues other key reasons that could support some kind of pause or even a pullback are; valuations, sentiment and recent economic data. All of which are little changed. Elevated valuations are still a valid concern, sentiment is heavily bullish (not historic levels, but quite high) and data, namely employment, is still dreadful with nearly another 1 million filing for unemployment last week with more than 28 million people still receiving unemployment benefits of some form. To put these unemployment numbers into context, in the last report of 2019 there were just 222,000 new claims and less than 2 million people were receiving benefits.

 

Historically the worst two months of the year for the market, August and September, are here. Conditions are conducive to a market pause or retreat, but it is likely to be short-lived. The Fed has pledged unwavering support for the economy and the market. The Federal government has spent trillions already and is highly likely to spend trillions more. It is in the best interest of all that are up for re-election to get the next round of support done and flowing to the electorate sooner rather than later.  

 

 

Over the last four weeks through yesterday’s close, S&P 500 climbed 4.8% and Russell 2000 jumped 7.1% higher. During the same time period the portfolio added 1.4% excluding dividends and any trading fees. Overall performance lagged the broader indexes due to being concentrated in generally defensive positions (shaded in grey in the table below) – specifically a sizable number of utilities and a significant percentage of the portfolio in cash. It is challenging to keep watching the market continue to move higher during the “Worst Six Months,” but our strategy has served well over the longer term and has a proven track record documented in the annual Stock Trader’s Almanac. Like other times in the past, seasonality has been overridden this year, but it is expected to return as the economy recovers.

 

Utilities continued to make progress through the balance of July into August, but the path has been choppy and not all have benefited. FirstEnergy Corp (FE), in the Large-Cap portfolio is an example of not participating. Earnings were fair, they delivered an earnings-per-share beat and just missed revenue expectations. It was allegations of bribery that triggered FE’s massive slide and subsequent close below its stop loss. FE was closed out using its average daily price on July 22, the day after it closed below its stop, and well below its stop loss price hence the much larger loss.

 

Remaining positions in the Large-Cap portfolio faired much better, but not enough to overcome the drag of FE. Abbott Labs (ABT), Brookfield Infrastructure (BIP), DTE Energy (DTE) and TOTAL (TOT) are all up double digits since being added to the portfolio in April excluding dividends and trading fees.

 

Mid-Caps and Small-Caps were responsible for the overall portfolio gains. One Gas (OGS) is the poorest performing Mid-Cap stock, off 14% still. A recent analyst upgrade of OGS could give shares a boost.

 

Including the cash balance in the Small-Cap portfolio resulted in a 1.7% gain since last update in mid-July. If this cash is excluded and only share performance is considered, the four small caps collectively jumped 16.8%. Last month AUB and SSB were in the red, both reversed and are now positive. KB Home (KBH) is the standout in the group, now up a little over 70%. 

 

All positions in the portfolio are on Hold. Please see table below for specific buy limits, stop losses and current advice.