Mid-Month and Stock Portfolio Updates: September Strikes Back
By: Christopher Mistal
September 10, 2020
After months of above average gains, the market has run into some trouble in what has historically been the worst month of the year, September, going back to 1950. As we noted in our September Outlook, in late August, the market was ripe for a pause and a corresponding pullback. Sentiment had reached lofty levels, valuations were at a minimum stretched and covid-19 was and still is depressing the economy. With numerous parts of the economy still restricted and/or completely shut down, unemployment has also remained persistently elevated while Congress continues to flounder with the next round of fiscal support.
We do not expect the current weakness to manifest into another bear. Most likely this current rout will be limited to a more typical pullback/correction that have occurred in past bull markets. For S&P 500 the average correction in a bull market since 1948 has been 14.3%. NASDAQ had soared highest and could slide furthest. DJIA and Russell 2000 lagged during the rally and are likely to retreat the least. Low rates, ample Fed liquidity and the high probability of additional government stimulus (most likely more targeted than previous rounds) will likely provide the support to stave off a deeper market retreat.
[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
This week’s Down Friday/Down Monday (DF/DM) is the first since March and is some cause for concern, but the fallout could be contained to September or possibly September-October. One potentially beneficial side effect of the current pullback is visible in the charts above. Technical indicators have retreated to levels that have not been seen since June or even late March depending on index and MACD has turned negative. Should the market retreat further, find support and consolidate, our Seasonal MACD Buy Signal could be well setup. The earliest our Seasonal Buy Signal can occur is October 1. Until then, caution is in order as the market works off its accumulated excesses. 
Stock Portfolio Updates
Over the last four weeks through yesterday’s close, S&P 500 climbed 0.6% and Russell 2000 dropped 3.6%. During the same time period the entire portfolio slipped 1.7% lower excluding dividends and any trading fees. Our Large-cap stocks weighted heavily on overall performance as defensive names, for the most part, failed to participate in August’s market rally and were down 7.3% collectively since last update. The Small-cap portion of the portfolio also drifted modestly lower with a 0.9% loss. Mid-caps were best, up 0.4% on average.
Once again 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 has been a challenging year for seasonality, but September appears to be getting seasonality back on track and we will continue to maintain a defensive posture in the Almanac Investor Stock and ETF Portfolios until we issue our Seasonal MACD Buy Signal on or after October 1.
Aside from general weakness in defensive positions, falling crude oil also weighed on positions in the Large-cap section of the portfolio. BP p.l.c. (BP) was the first to close below its stop loss on August 21 and get closed out for an 11.4% decline. Exxon Mobil (XOM) closed below its stop today and also has been closed out of the portfolio for an 8.5% loss. Persistent weakness in the energy sector is most likely the result of tepid growth forecasts, an abundance of supply and a broad and expanding interest in and use of alternative energy sources.
Zto Express (ZTO), one of just two positions to survive March’s bear market, was also stopped out today. Second quarter earnings, released in mid-August, were a soft miss. Shares appear to have stalled out ahead of earnings and have been trending lower since. If ZTO can get expenses reined in and get gross margins heading in the right direction again, it would be worth another look. Until then we will let it go.
Small-caps and Mid-caps are barely represented in the portfolio as both have been unable to maintain positive momentum. Small-caps typically do lag during the summer months and this is one seasonal pattern that has held this year. KB Home (KBH) and JetBlue Airways (JBLU) are too bright spots in the Small- and Mid-cap portfolios. KBH is modestly lower over the past four weeks, but is still up 67.2% while JBLU was up 5.5% over the same period and is up 43.3% since addition in April. KBH and JBLU are on Hold.
One Gas Inc. (OGS) was also recently stopped out. Shares of OGS have been trending lower since sharply rebounding in April. Second quarter earnings were fair with a bottom-line beat however, a decline in revenues was not well received. If shares can find some price stability and stop their slide lower, its forward dividend yield over 3% would be even more attractive. 
All positions in the portfolio are on Hold. Please see table below for specific buy limits, stop losses and current advice.
[Almanac Investor Stock Portfolio Table]