September 2019 Trading & Investment Strategy
August 29, 2019
Market at a Glance - 8/29/2019
By: Christopher Mistal
8/28/2019: Dow 26036.10 | S&P 2887.94 | NASDAQ 7856.88 | Russell 2K 1456.04 | NYSE 12559.23 | Value Line Arith 5861.14
Psychological: Fading. According to Investor’s Intelligence Advisors Sentiment survey, bulls are at 43.9%. Correction advisors are at 37.4% and Bearish advisors are 18.7%. The drop in bullish sentiment and the increase in correction/bearish advisors is near levels observed at the end of May. Overall, the decline in bullish sentiment has corresponded with the decline and choppy trading of recent, but it has yet to slip to levels often seen near significant market bottoms.
Fundamental: Sketchy. Q2 GDP was revised lower to 2.0%. Trade tensions between U.S. and China continue to spiral with each new escalation bringing only more uncertainty. Yield curve inversions abound stoking recession fears that just drive rates lower. Some bright spots exist. Unemployment is low and the economy is still growing just at a slower pace.
Technical: Range bound? Since early August DJIA, S&P 500 and NASDAQ have essentially been trading between their respective 50- and 200-day moving averages. Support has held, but overhead resistance has also held. Trade and/or the Fed are likely to be the catalyst that pushes the market through one barrier or the other. 
Monetary: 2.00-2.25%. It would appear that the Fed is still behind the curve. Yields across the duration spectrum have plunged. Multiple central banks have cuts rates while the Fed ponders and remains data dependent. If the Fed waits for the data, it could be too late to avoid further slowing and possibly a recession.
Seasonal: Bearish. Since 1950, September is the worst performing month of the year for DJIA, S&P 500, NASDAQ (since 1971) and Russell 1000 (since 1979). Russell 2000 ranks second worst (since 1979). In pre-election years, rankings are unchanged while average losses expand.
September Outlook: Volatility Continues & End Q3 Weakness
By: Jeffrey A. Hirsch & Christopher Mistal
Last month we warned that the market was ripe for a seasonal pullback. Within days of our monthly missive late-July and early-August delivered their typical seasonal weakness, of course with a little help from the Fed, yield curve and hot-button geopolitics. At the risk of sounding like a broken record, we expect the market to continue to track the seasonal and 4-year election cycle patterns closely as it has all year long.
Our updated chart of Pre-Election Year Seasonal Patterns overlaid with 2019 to date highlights the amplitude of August 2019 price swings as well as how closely market price action this year has tracked the historical trend and pattern. This suggests 2019 will continue to move in synch with the seasonal moves depicted on the chart. 
[Pre-Election Year Seasonal Patterns CHART]
So we expect the market to move higher toward the July highs until the last week of the September, which is the treacherous Week After Q3 Triple Witching – down 23 of the last 29 years for the S&P 500. Then the market tends to have a downward bias until late October. 
The CME Group’s FedWatch Tool currently has the odds of a ¼ point rate cut at the next meeting on September 18 as a virtual lock at 95.8%. Many on The Street are secretly (or not so secretly) expecting a ½ point cut. Negative market reaction to only a ¼ point and perhaps some more ambiguous comments from Fed Chair Powell, could fall right in line with Q3 Triple Witching volatility, end-of-September seasonal weakness after quarterly expiration and institutional portfolio restructuring and window dressing.
Technically speaking, the market has settled into a range between 2815 and 2945 on the S&P 500. S&P 2815 is a support level we have been tracking for some time now that sits at the intraday high back on November 7, 2018 where the market failed last fall before the 20% correction ran its course to the Christmas Eve low. The good news is the 2815 has held here this time unlike the ~2700 level last fall.
[S&P 500 Technical Support/Resistance Chart]
The bad news or at least the technical case for no new highs is that the S&P has yet to clear the 2945 level, which was the intraday high on Friday August 2 that was the beginning of two back-to-back Down Friday/Down Mondays, which has a negative indication if not quickly reclaimed.
So look for the market to drift higher into mid-September with a struggle to break above 2945-2955 on the S&P, which is right at the 50-day moving average (DMA). If it can clear that level it may be able make a run at the highs before turning lower the last week of September. October could likely see a retest of 2815 with the 2725 support level that was held in June also being in play. Stick to the drill and wait for our Best Six Months Seasonal MACD Buy Signal before jumping back in with both feet.
Pulse of the Market
DJIA’s stretch at new all-time highs in July was brief and August lived up to its reputation as the worst month of the year since 1988. A tweet and the resulting decline on the first trading day of August set the tone for the rest of the month. DJIA quickly broke its 50-day moving average, but thus far support at the 200-day moving average has held (1). 
Slower and faster moving MACD indicators, that were confirming overbought conditions throughout much of July, rapidly turned negative in early August confirming the loss of positive momentum. Both MACD indicators were positive as of August 28 close (2). However, further strength is needed to truly confirm recent weakness is ending and will not spill over into September.
Dow Jones Industrials & MACD Chart
Early in August DJIA recorded its fifth and sixth Friday/Down Monday (DF/DM) occurrences of 2019 (3). New research into back-to-back DF/DM’s yielded similar results as a single DF/DM. There is a window in which if recovery from the losses is swift, then the likelihood of further declines begins to fade. But, if losses are not recovered quickly, then further weakness becomes likely. The window has closed and DJIA is not back to pre-DF/DM levels.
After four straight weeks of declines by DJIA, S&P 500 (4) and NASDAQ (5) a gain this week and next would not be all that surprising. Sentiment has soured and those that wanted out have likely already sold. The last four-week losing streak in May was followed by three straight weeks of gains, but that rally was driven mostly by the Fed signaling its willingness to cut rates which occurred at the Fed’s July meeting and is already widely expected at the next.  
Market breadth measured by NYSE Weekly Advancers and NYSE Weekly Decliners (6) has been in line with four straight weeks of losses. Weekly Decliners easily outnumbered Weekly Advancers throughout August. One potentially worrisome observation, or lack of, is the absence of at least one heavily lopsided week. May’s market retreat had one week (ending May 31) where Decliners outnumbered Advancers by over 3 to 1. At the December bottom the ratio was over 11 to 1. This week’s reprieve could be short-lived.
Weekly New Highs and Lows (7) exhibited odd behavior throughout August. New Highs actually peaked when DJIA, S&P 500 and NASDAQ all shed 2.6% or more during the week ending August 2. And New Highs expanded last week as the major indexes went lower. Strength in precious metals and in defensive, rate sensitive shares likely accounts for the somewhat unusual readings. Also noteworthy the peak of 603, was still lower than the previous peak of 621 recorded in the final week of January 2018.
When the Fed cut in July, the 30-year Treasury bond yield (8) started its race lower. Last week’s 2.06 reading is a record low and it slipped under 2.00 this week. Historically low rates have been a positive for stocks. However, in a world where rates in other countries are actually negative, 2.00 does seem somewhat high.
Click for larger graphic…
Pulse of the Market Table
September Almanac: The Other Worst Month
By: Jeffrey A. Hirsch & Christopher Mistal
August 22, 2019
The start of business year, end of summer vacations, and back to school made September a leading barometer month in first 60 years of 20th century, now portfolio managers back after Labor Day tend to clean house Since 1950, September is the worst performing month of the year for DJIA, S&P 500, NASDAQ (since 1971) and Russell 1000 (since 1979). Sizable gains in September 2012, 2013 and 2017 have lifted Russell 2000 to second worst (since 1979). September was creamed four years straight from 1999-2002 after four solid years from 1995-1998 during the bubble madness. September gets no respite from positive pre-election year forces.
[Pre-Election Year Mini Table]
Although the month used to open strong, S&P 500 has declined eight times in the last eleven years on the first trading day. As tans begin to fade and the new school year begins, fund managers tend to sell underperforming positions as the end of the third quarter approaches, causing some nasty selloffs near month-end over the years. Recent substantial declines occurred following the terrorist attacks in 2001 (DJIA: –11.1%), 2002 (DJIA –12.4%), the collapse of Lehman Brothers in 2008 (DJIA: –6.0%) and U.S. debt ceiling debacle in 2011 (DJIA –6.0%). However, September is improving with S&P 500 advancing in ten of the last 15 Septembers and DJIA climbing in nine.
September Triple Witching week is generally bullish with S&P 500 advancing twice as many times as declining since 1990, but is has suffered some sizable losses. Triple-Witching Friday was essentially a sure bet for the bulls from 2004 to 2011 but has been a loser four or five of the last seven years, depending on index. The week after Triple Witching has been brutal, down 23 of the last 29, averaging an S&P 500 loss of 0.95%. In 2011, DJIA and S&P 500 both lost in excess of 6%. The week after was positive in 2016 and 2017.
In recent years, Labor Day has become the unofficial end of summer and the three-day weekend has become prime vacation time for many. Business activity ahead of the holiday was more energetic in the old days. From 1950 through 1977 the three days before Labor Day pushed the DJIA higher in twenty-five of twenty-eight years. Bullishness has since shifted to favor the two days after the holiday as opposed to the days before. DJIA has gained in 16 of the last 25 Tuesdays and 18 of the last 24 Wednesdays following Labor Day.
September (1950-2018)
  DJI SP500 NASDAQ Russell 1K Russell 2K
Rank 12 12 12 12 11
# Up 28 31 26 20 22
# Down 41 37 22 20 18
Average % -0.7   -0.5   -0.5   -0.6   -0.4
4-Year Presidential Election Cycle Performance by %
Post-Election -0.5   -0.5   -0.2   -0.5   -0.04
Mid-Term -0.8 -0.4 -0.8 -1.0 -0.8
Pre-Election -1.0 -0.9 -0.9 -1.0 -1.6
Election -0.4 -0.2 -0.04 0.2 0.8
Best & Worst September by %
Best 2010 7.7 2010 8.8 1998 13.0 2010 9.0 2010 12.3
Worst 2002 -12.4 1974 -11.9 2001 -17.0 2002 -10.9 2001 -13.6
September Weeks by %
Best 9/28/01 7.4 9/28/01 7.8 9/16/11 6.3 9/28/01 7.6 9/28/01 6.9
Worst 9/21/01 -14.3 9/21/01 -11.6 9/21/01 -16.1 9/21/01 -11.7 9/21/01 -14.0
September Days by %
Best 9/8/98 5.0 9/30/08 5.4 9/8/98 6.0 9/30/08 5.3 9/18/08 7.0
Worst 9/17/01 -7.1 9/29/08 -8.8 9/29/08 -9.1 9/29/08 -8.7 9/29/08 -6.7
First Trading Day of Expiration Week: 1990-2018
#Up-#Down   19-10   16-13   12-17   16-13   13-16
Streak   D1   D1   D1   D1   D1
Avg %   -0.05   -0.1   -0.3   -0.1   -0.2
Options Expiration Day: 1990-2018
#Up-#Down   16-13   16-13   18-11   17-12   19-10
Streak   U2   D1   D1   D1   D1
Avg %   0.03   0.1   0.1   0.1   0.2
Options Expiration Week: 1990-2018
#Up-#Down   18-11   20-9   19-10   20-9   18-11
Streak   U3   U3   D1   U3   D1
Avg %   0.2   0.3   0.2   0.3   0.4
Week After Options Expiration: 1990-2018
#Up-#Down   7-22   6-23   11-18   7-22   9-20
Streak   D1   D1   U1   D1   D1
Avg %   -1.0   -1.0   -0.9   -1.0   -1.4
September 2019 Bullish Days: Data 1998-2018
  4, 5, 11, 12, 17 11, 12, 17, 26, 27 2, 11-13, 17 3, 11, 12, 17 3, 6, 11-13, 17
  19, 26     26, 27  
September 2019 Bearish Days: Data 1998-2018
  6, 23, 24, 30 4, 20, 23, 24, 30 16, 23 4, 23, 24 20, 23
September 2019 Strategy Calendar
By: Christopher Mistal
August 22, 2019
Mid-Month Update: Trade Deal Needed to Break Feedback Loop
By: Christopher Mistal
August 15, 2019
One week prior to the beginning of the market’s August’s tumble, we warned that the month was ripe for a seasonal pullback in our August Outlook released on July 25. Even though weakness was sparked by a single tweet about additional tariffs, an event that would have been virtually impossible to predict or forecast, numerous other reasons existed to be more cautious. First off is the tepid historical performance of August and September. The fact that markets have been largely tracking past pre-election year historical performance quite closely and August was a weak spot here to also factored in.
In response to recent market weakness and additional tariffs that would most likely further dampen growth and increase uncertainty, central banks around the globe cut key interest rates. This made U.S. yields (and their relative safety) even more attractive to foreign and domestic investors. This likely pushed the 10-year yield falling below the 2-year yield triggering what many view as a strong indicator of a future recession which only adds to demand for safe-haven assets that drives yields even lower further inverting the yield curve.
That single tweet and the Fed’s recent rate cuts appear to have created a nearly perfect feedback loop that if not corrected quickly could easily continue to pressure markets and accelerate the arrival of an actual recession. Some kind of trade deal with China is needed to break the cycle and set the market free from all the trade uncertainty. It does not need to be a perfect deal any deal would likely be sufficient. Delays in implementing tariffs are not going to cut it forever and sooner rather than later the market is going to get fed up with the on-again/off-again nature of the “talks.”
However, sometime soon we are likely to begin to see some real progress on a trade deal with China. Elections are rapidly approaching and historically recessions and/or economic malaise have not been kind to sitting presidents and/or the incumbent party. Some deal or at least deal framework before the end of the year could give the economy and the market the time it needs to regain firmer footing and restore confidence for the electorate. Until such deal is announced, the market is likely to continue to track the typical pre-election year pattern. More backing and filling accompanied by higher levels of volatility until mid-December.
DJIA Struggling with Support
Following the worst day of the year, DJIA, S&P 500 and NASDAQ finished today mixed. DJIA advanced 0.39%, S&P 500 gained 0.25% and NASDAQ finished slightly lower, off 0.09%. Our favorite technical indicators, Stochastics, relative strength and MACD, are all still negative. DJIA, S&P 500 and NASDAQ all failed to reclaim their respective 50-day moving averages last week and this Tuesday. S&P 500 and NASDAQ are still comfortably above their 200-day moving averages, but DJIA closed below its 200-day moving average for a second day in a row.
[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
Almanac Investor ETF and Stock Portfolios are positioned for the “Worst Months.” Continue to limit new buying, heed stop losses and maintain an overall defensive posture. September’s historical record is similar to August and these months have been taking turns at the bottom of the rankings for decades. 
Stock Portfolio Update: Sticking to the Game Plan
By: Jeffrey A. Hirsch & Christopher Mistal
August 08, 2019
Okay, so the market has been volatile the past two weeks reacting to the Fed rate cut and more so the U.S.-China trade dispute. But in reality this is precisely the typical summer, especially early-August, seasonal weakness we have been warning about, so we are not panicking, but that does not mean the market is out of the woods yet. There is still some technical work to be done. 
At the risk of being repetitive, we remind you that the market continues to track the seasonal patterns closely, which suggests to us that it is likely to continue to do so. The chart below of the Pre-Election Year Seasonal Patterns clearly illustrates that despite somewhat greater amplitude DJIA, S&P 500 and NASDAQ have been following the seasonal trend this year. The late-July/early-August drop we just experienced came right on cue, which puts us on an upward trajectory through mid-September before another reversal into late-October.
Seasonal Chart
But things will need to continue to get constructive technically soon or else further declines become a higher probability. In the next chart we have updated the technical support and resistance levels for the S&P 500.
The Down Friday/Down Monday (DF/DM) broke through initial support at S&P 2875 near the old January 2018 highs, but we held the next level of support at 2815 where the S&P failed intraday back on November 7, 2018, before the December selloff, which was rather constructive. Today’s rally was further improvement, but we have yet to reclaim the level before this past DF/DM. The sooner we clear this new overhead resistance around 2955 near the May 1 intraday high and the close of Thursday August 1 just prior to this latest DF/DM, the better the technical picture will be.
If we cannot take out 2955 soon and then breach the next level of support the situation begins to look like the beginning of the selloff last October. Support at 2775 runs through several gaps and consolidations, but the next level of support around 2725 where we held in early June is important. 2650 is minor support below there, but critical support sits at the old February/April 2018 lows 2580.
If we can retake 2955 in short order then we would expect the market to drift higher into mid-September, perhaps logging minor new highs.
S&P Technical Chart
Stock Portfolio Updates
In the time since last update through yesterday’s close the Almanac Investor Stock Portfolio slipped 1.8% lower compared to a 3.4% loss by S&P 500 and a 3.2% loss from the Russell 2000. Large-cap holdings, also the majority of the portfolio, declined the most, off 4.8%. Mid-cap holdings declined 1.5% on average while small-caps shed 0.9%. Compared to the S&P 500 or Russell 2000, portfolio performance was assisted by a sizable cash position that buffered against a larger retreat. 
During the recent market retreat triggered by additional tariffs on China, a brisk weakening of the yuan and the potential impacts on already slowing global growth, both positions in the small-cap portfolio were stopped out. Mix Telematics (MIXT) had been floundering long before the pullback commenced and was quickly stopped out on August 1. Clarus Corp (CLAR) was up 27.4% last update, but those gains quickly evaporated when earnings were released on August 5 that disappointed.
Two additional positions were also stopped out in the large-cap portfolio. Ugi Corp (UGI) and Southern Copper (SCCO) were both stopped out on the close on August 5. Modest gains were recorded on both positions with SCCO suffering the biggest reversal of the two. UGI was another position that had just been treading water for a while. Here again a tough overall market and a tepid earnings report tanked shares. SCCO’s brisk decline was also earnings and overall market driven.
On a more optimistic note, market weakness did offer opportunity to establish new positions (or add to existing) in our recent defensive stock ideas. New positions were established in South Jersey Industries (SJI), NiSource Inc. (NI), Dominion Energy (D) and AT&T (T). SJI, NI and D were still trading below their respective buy limits as of yesterday’s close and could still be considered around current levels. However, T is on hold as it is up 7.8% already.
Bayer (BAYRY) is currently the best performing new defensive position, up 8.8% at yesterday’s close and another 4.2% today. BAYRY is reorganizing to focus on its core health care and crop technologies businesses, but its biggest headwind is lawsuits regarding Roundup weed killer. BAYRY is on hold. All other positions from the defensive basket not previously mentioned can still be considered near current levels or on dips. Please see updated portfolio table below for current buy limits and stop losses.
Shortly after last update, NASDAQ’s Seasonal Sell Signal triggered. This marked the end of the favorable period for tech and small-cap shares. And as the market has demonstrated lately, hard-fought gains can quickly vanish. August and September are also the two worst months for the market over the longer-term and recently as well. A defensive posture is warranted. Limit new buying, heed stop losses and consider a larger than usual cash position.
[Almanac Investor Stock Portfolio Table – August 7, 2019 Closes]
ETF Trades: Summer Doldrums Arrive, Bonds & Defense Best
By: Christopher Mistal
August 01, 2019
July’s employment situation report, typically released on the first Friday of August, has largely been a market disappointment over the last eighteen years. DJIA, S&P 500, NASDAQ, Russell 1000 and Russell 2000 have all declined a majority of the time. Average, historical performance on the day has been negative with Russell 2000 declining the most, off 0.54%. Nearly across-the-board strength in five of the last seven years has improved average performance as the prior eleven-year stretch was nearly all bearish.
[Performance (%) on Employment Report Date in August Table]
Yesterday’s ADP private sector employment report showed 156k jobs were added in July. This was modestly better than the consensus estimate of 150k and the report also came with an upward revision to June’s number. This suggests that tomorrow’s employment situation report could be solid as well. Current estimates are looking for around 165k net new jobs being added in July and the unemployment rate is anticipated to decline to 3.6%.
Historically, the employment report has been an important data point that the Fed monitored closely. Tomorrow’s report is not likely to be all that important as what happens next in the trade dispute with China. The Fed gave the market a small cut and an early ending to quantitative tightening on Wednesday and the market failed to advance. And today the market responded harshly to the report of additional tariffs on China. It would appear what the market is really longing for is an end to trade turmoil with China. 
New Trade Ideas for August Seasonalities
Biotechnology sector enters its historical favorable season in August. iShares NASDAQ Biotech (IBB) could be bought on dips below $91.00 [this is not a typo]. An initial stop at $81.90 is suggested. The auto sell is $132.75 based upon historical average performance. A 16.7% average gain has occurred over the last 15 years while an average gain of 18.0% has taken place the most recent 5 years. Top five holdings are: Amgen, Gilead Sciences, Celgene, Illumina and Vertex Pharmaceuticals.
[iShares NASDAQ Biotech (IBB) Daily Bar Chart]
Over the last 15 years, High-Tech has generated an average return of 12.5%, and for the last five years the average has been 10.8% during its bullish season from mid-August to mid-January. Our top ETF within this sector is iShares DJ US Tech (IYW). A buy limit of $150.00 and stop loss of $135.00 are also not errors. If high-tech produces above average gains, profits will be taken at the auto sell of $210.94. IYW’s top five holdings are: Microsoft, Apple, Alphabet, Facebook and Cisco. These five holdings represent 52.77% of IYW’s total holdings. Tech has been an unstoppable freight train of growth and performance, that trend is likely to continue.
[iShares DJ US Tech (IYW) Daily Bar Chart]
Why are these buy limits seemingly so low? The simplest answer is a repeat of last December’s market rout is an increasingly likely scenario now. The market did not immediate shoot higher when the Fed delivered and its response to additional tariffs today is a reminder that hard-fought gains can quickly vanish. The market’s brisk reversal also appears to signal that the Fed and interest rates are not the real concern any more, it is trade.
Sector Rotation ETF Portfolio Updates
The summer doldrums and the worst two-month span (August-September) of the year have arrived. The Sector Rotation ETF Portfolio is mostly well-positioned for the next two months. Defensive positions in XLP, XLV and XLU have held up and continue to produce dividends. Gold and silver positions have not yet been added to the portfolio as their trajectory over the past two months has been higher with only slightest hint of an occasional pullback. VanEck Vectors Gold Miners (GDX), SPDR Gold (GLD) and iShares Silver (SLV) can all be considered on dips below their respective updated buy limits.
Seasonal Sector trade ideas from June and July have been added to the portfolio table below. June’s trades in livestock and broader commodities, COW and DBA, traded below their respective buy limits in mid-June. DBA has since been stopped out while COW remains with a small loss. Seasonal strength in live cattle typically lasts through the end of the year and into the next which could provide time for COW to recover. DBA is likely to continue to slip lower as China’s only real response to additional tariffs is to hit our agricultural sector with tariffs or even a boycott.
Two new positions that could benefit from further market weakness have been added to the portfolio. iShares Transportation (IYT) was shorted in mid-July when it first broke out above resistance. IYT short position is on hold. The criteria to establish a position in ProShares UltraShort S&P 500 (SDS) was satisfied today when SPDR S&P 500 (SPY) broke down through $295. SDS was added to the portfolio using today’s closing price and is on Hold. A 3.5% trailing stop loss is suggested for SDS. Update the stop using daily closing prices.
Please see table below for current advice, updated buy limits and stop losses.
[Almanac Investor SR ETF Portfolio – August 1, 2019 Closes]
Tactical Seasonal Switching ETF Portfolio Update
In accordance with our Seasonal MACD Sell Signal for NASDAQ issued before the market’s open on July 22, remaining long positions in Invesco QQQ (QQQ) and iShares Russell 2000 (IWM) have been closed out. The combination of our initial purchase last year and additional purchases in January resulted in an average return of 10.5% for tech and small-cap positions. Tech was the biggest winner with both NASDAQ positions returning an average 16.5% in slightly less than nine months.
Defensive, “Worst Months” positions in the portfolio have been performing well. iShares 20+ Year Treasury Bond (TLT) has a 9.5% gain as of today’s close. AGG and BND are also positive with gains of 3.3% and 3.5% respectively. As a reminder, the more diverse maturities held by AGG and BND are likely to exhibit a greater degree of price stability while also returning a yield that is comparable to TLT. If you are risk adverse, AGG and BND may be a better choice over more price volatile TLT.
AGG, BND and TLT can still be considered on dips below their respective buy limits.
[Almanac Investor TSS ETF Portfolio – August 1, 2019 Closes]