September 2020 Trading & Investment Strategy
August 27, 2020
Market at a Glance - 8/27/2020
By: Christopher Mistal
August 27, 2020
8/26/2020: Dow 28331.92 | S&P 3478.73 | NASDAQ 11665.10 | Russell 2K 1560.19 | NYSE 13042.50 | Value Line Arith 6464.26
Fundamental: Improving. Compared to a few months ago, the economy has improved. Today’s second estimate of Q2 GDP improved to a decline of 31.7% from last month’s reading of –32.9%. Still a historic decrease that is likely to take a significant amount of time to recover from. Unemployment is also off of its worst levels, but the trend of improvement has stalled with weekly initial jobless claims stubbornly remaining around 1 million in recent weeks. Corporate earnings, most notably from mega-cap technology, have been solid. However, millions are still struggling and further assistance from the Fed and the Federal government will likely be needed.
Technical: Broken Out? S&P 500 and NASDAQ have broken out to new all-time highs on mega-cap tech strength. DJIA is rapidly closing in on previous all-time highs and is about to get a boost with the replacement of Exxon Mobil, Pfizer and Raytheon in favor of Salesforce, Amgen and Honeywell. But the breakout is in danger as rally participation is fading with S&P 500, NASDAQ and NYSE Advance/Decline lines off mid-August highs.  
Monetary: 0 – 0.25%. Average inflation targeting and more focus on the lower end of income spectrum when evaluating unemployment are the two new policy adjustments announced today by Fed Chairman Powell. Once through the background and reasoning for the changes it boils down to rates will likely stay low, near zero, even longer than previously expected due to the changes. The last time the Fed stayed at 0 – 0.25% for seven years (December 16, 2008 through December 16, 2015).
Seasonal: Bearish. September (since 1950) is the worst performing month of the year for DJIA, S&P 500, NASDAQ (since 1971) and Russell 1000 (since 1979). Bullish election-year forces do little to improve on September’s poor overall performance since 1950. Performance does improve slightly in election years, but it remains negative nearly across the board. Only the Russell 1000 and Russell 2000 have been able to escape negative territory and post modest 0.2% and 0.8% average gains respectively in the last ten election-year Septembers.
Psychological: Frothy. According to Investor’s Intelligence Advisors Sentiment survey Bullish advisors are now at 60.0%. Correction advisors stand at 23.8% while Bearish advisors stand at 16.2%. Historically Bullish advisors at 60.0% and above is an increasing danger to the market. Timing for a top is still unknown and sentiment could remain high for weeks or even months, but caution is in order.
September Outlook: Ripe for a Brief Pause during the March Higher
By: Jeffrey A. Hirsch & Christopher Mistal
August 27, 2020
Reflecting on this historic and crazy year from the breezy climes on the southern end of Long Beach Island, New Jersey we are encouraged by the tale of the tape and the stance of monetary policy and fiscal stimulus. Two old market postulates are currently at play: “Don’t fight the tape,” and “Don’t fight the Fed.” In addition we have massive, unprecedented fiscal stimulus with little place to go but into the stock market, particularly U.S. stocks. The Fed’s new approach to inflation and their already firm stance to keep rates near zero for the foreseeable future indicate the bears will be hard-pressed to survive.
And now election forces have finally begun impacting the market again after they were usurped by the pandemic. Regardless of who wins the election the current administration is still priming the pump as all incumbent administrations have done since time immemorial. This is what creates the 4-year cycle. Here in Covid-time the White House has been making deals and pumping money into any and all tests, treatments and vaccines for Covid. 
There is still a bit of dichotomy between NASDAQ, S&P 500, DJIA and the small-cap Russell 2000 index. On the back of the new work-from-home economy and the biotech/pharma push to combat this virus NASDAQ stocks have been strongest and first to blow out the old highs in June and have led the market higher through this whole pandemic quarantine fiasco. S&P has just cleared its high-water mark in August. DJIA flirted with turning positive for the year today as we go to press and the new changes to the Dow are likely to make it easier for the blue-chip benchmark to reach new highs. The Russell 2000 continues to lag. 
Technical resistance is all but destroyed and the market is on a path higher fueled by massive stimulus, ultra-low interest rates and infinitely accommodative monetary policy. Sentiment is high but that can persist for months before the market corrects. Market breadth and valuations are concerning as is September’s infamous history of declines, even in election years.
It will be instructive to see how the market reacts to the conclusion of the Republican National Convention tonight over the next several days and weeks. Any signs of weakness or concern that the incumbent is not going to win in November will put pressure on the market to pullback in September. But if the market rallies around the president and we continue to corral this pandemic we don’t expect much of a pullback.
If things continue to move back toward normal as they appear to be doing here “down-the-shore” as well as back home in Rockland County and at the office in Westchester in what was once on the outskirts of ground zero for the pandemic in the U.S., the economy will rebuild and reshape itself into a new more efficient organism fueled on lower labor costs, Fed Kool-Aid, fiscal stimulus and technological productivity growth no matter who wins the election. 
2021 is a different story. A new administration is more likely to make major economic changes that would take some time for the market to adjust to and the market would likely be weaker as it acclimates to the different circumstances. But for now it looks like the market and economy will remain in recovery mode for the rest of 2020 with the potential for a pullback highest in September and leading up to this likely contentious election.
Pulse of the Market
With only two trading sessions remaining, the market has more than beat expectations for a solid election-year August performance. As of August 26 close, DJIA was up 7.2% so far in August. DJIA has eclipsed its previous recovery high reached in early June and a bullish golden cross (50-day moving average has crossed back above the 200-day moving average) has been formed (1). Shares of Apple are responsible for nearly 30% of DJIA’s gain this month, up over 19% on momentum generated by becoming the first U.S. company to exceed $2 trillion in market value and a four-for-one split. 
Perhaps even more significant for the future of DJIA are upcoming changes that will remove Exxon Mobil, Pfizer and Raytheon in favor of Salesforce, Amgen and Honeywell. These changes are said to account for Apple’s split and result in a reduction to DJIA’s exposure to the information technology sector. Once the dust settles from the split and component changes, the road higher would appear to have gotten much easier provided current market trends persist.
Positive momentum has also kept both the faster and slower MACD indicators applied to DJIA positive (2) as of yesterday’s close. Although both MACD indicators have been choppy since early July, their trend has also been bullishly higher. However, some caution may be in order as DJIA still has not reached a new all-time high even with a generous amount of tech strength helping out.
DJIA’s streak of winning first trading days of the week did come to an end in August (3) at thirteen in a row. The streak’s end however had little impact on DJIA and there still has not been a Down Friday/Down Monday (DF/DM) occurrence since late March. The lack of selling on Fridays and Mondays confirms the return of confidence or at a minimum unwavering faith in the Fed. S&P 500 (4) and NASDAQ (5) have advanced for four straight weeks, lending further support to trader and investor confidence levels.
Market breadth measured by NYSE Weekly Advancers and NYSE Weekly Decliners (6) has remained choppy over the last four weeks as tech stocks have extended year-to-date gains and new all-time highs. For the week ending August 21, decliners outnumbered advancers nearly 2 to 1 even though NASDAQ gained 2.7% and S&P 500 climbed 0.7% that week. Participation in the rally is narrowing and warrants attention as it could be an early indication a pullback could be nearing, or it could just be a “momentary” blip. 
Weekly New Highs (7) have also slipped modestly lower in each of the last two weeks while Weekly New Lows have begun to tick higher. This is another possible sign that the rally is narrowing and could be approaching a turning point. 
Near-term interest rates (8) are heavily influenced by the Fed and have remined near zero since March. The 30-year Treasury rate is also influenced by the Fed just to a lesser degree and it has been on the rise lately in concert with rising stock prices. This is not unusual nor is it strange for the rate to move higher as the U.S. dollar softens. So far, the increase has been modest and overall rates remain low. Historically low rates have been good for consumers and the market.
[Pulse of the Market]
September Almanac: Historically Another Challenging Month
By: Christopher Mistal & Jeffrey A. Hirsch
August 20, 2020
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 2009, 2010, 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 buildup. 
Election Year September Performance Mini Table
Bullish election-year forces do little to improve on September’s poor overall performance over the same timeframe. September’s performance does improve slightly in election years, but it is still negative nearly across the board. Only the Russell 1000 and Russell 2000 have been able to escape negative territory and post modest 0.2% and 0.8% average gains respectively in the last ten election year Septembers.
Although the month used to open strong, S&P 500 has declined nine times in the last twelve 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. This has caused 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 11 of the last 16 Septembers and DJIA climbing in 10.
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 five or six of the last eight years, depending on index with S&P 500 weakest, down seven of the last eight. The week after Triple Witching has been brutal, down 24 of the last 30, 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 last positive in 2016 and 2017 for DJIA and S&P 500.
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 26 Tuesdays and 19 of the last 25 Wednesdays following Labor Day.
September (1950-2019)
  DJI SP500 NASDAQ Russell 1K Russell 2K
Rank 12 12 12 12 11
# Up 29 32 27 21 23
# Down 41 37 22 20 18
Average % -0.6   -0.4   -0.5   -0.5   -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 -0.8 -0.8 -0.8 -0.7 -1.3
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: 1990-2019
#Up-#Down   19-11   16-14   12-18   16-14   14-16
Streak   D2   D2   D2   D2   U1
Avg %   -0.06   -0.10   -0.32   -0.11   -0.18
Options Expiration Day: 1990-2019
#Up-#Down   16-14   16-14   18-12   17-13   19-11
Streak   D1   D2   D2   D2   D2
Avg %   0.01   0.10   0.07   0.09   0.14
Options Expiration Week: 1990-2019
#Up-#Down   18-12   20-10   19-11   20-10   18-12
Streak   D1   D1   D2   D1   D2
Avg %   0.12   0.25   0.20   0.25   0.30
Week After Options Expiration: 1990-2019
#Up-#Down   7-23   6-24   11-19   7-23   9-21
Streak   D2   D2   D1   D2   D2
Avg %   -1.00   -0.95   -0.95   -0.95   -1.42
September 2020 Bullish Days: Data 1999-2019
  2, 3, 10, 11, 16 9, 10, 11, 16 10, 11, 14, 16 9, 10, 11, 16 10, 16
        17, 28  
September 2020 Bearish Days: Data 1999-2019
  22, 23, 24 21-24, 30 15, 21, 22, 23 18, 21-24 18, 21, 22, 23
September 2020 Strategy Calendar
By: Christopher Mistal
August 20, 2020
Mid-Month and Stock Portfolio Updates: So Far, Market Blasting Through Seasonal Weakness
By: Christopher Mistal
August 13, 2020
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.
[August 21-Year Seasonal Pattern Chart]
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.
[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
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.  
Stock Portfolio Updates
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.
[Almanac Investor Stock Portfolio Table]
ETF Trades: Tech Keeps On Rolling
By: Christopher Mistal
August 06, 2020
July’s employment situation report, typically released on the first Friday of August, has largely been a market disappointment over the last nineteen 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 0.57%. Nearly across-the-board strength in five of the last eight 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 just 167k jobs were added in July. This was nowhere near the 1 million expected. ADP also revised its June total sharply higher than their initial estimate. The ADP report has not been as reliable over the past few months as their numbers have differed widely from the official government numbers. But ADP’s number is somewhat consistent with the trend in weekly claims data and suggests Friday’s official BLS (Bureau of Labor Statistics) release could be softer than expected as well. Current estimates for the BLS report are looking for around 1.5 million jobs being added in July.
Friday’s report may have little impact on the market, just as this week’s ADP report miss had no measurable effect. The Fed has pledged to do everything in its power to support the economy on multiple occasions and another round of stimulus from the Federal government is all but guaranteed as we head toward election day. The timing and magnitude of federal stimulus may still be up in the air, but more is on its way.
New Trade Ideas for August Seasonalities
Biotechnology sector enters its historical favorable season in August. SPDR S&P Biotech (XBI) could be bought at current levels up to a buy limit of $114.00. An initial stop at $100.32 is suggested. The auto sell is $143.71 based upon historical average performance. A 14.6% average gain has occurred over the last 15 years while an average gain of 10.9% has taken place the most recent 5 years. Top five holdings are: Novavax, OPKO Health, Invitae, Emergent BioSolutions and Sorrento Therapeutics.
[SPDR S&P Biotech (XBI) Daily Bar Chart]
Over the last 15 years, High-Tech has generated an average return of 9.4%, and for the last five years the average has been 5.6% during its bullish season from mid-August to mid-January. Our top ETF within this sector is iShares DJ US Tech (IYW). Set a buy limit of $300.00 and an initial stop loss of $264.00 if purchased. Should high-tech produce above average gains, profits will be taken at the auto sell of $361.02. IYW’s top five holdings are: Apple, Microsoft, Facebook, Alphabet Class A & C shares and Nvidia. These five holdings represent 54.35% 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]
Sector Rotation ETF Portfolio Updates
The summer doldrums and the worst two-month span (August-September) of the year have arrived. Thus far it doesn’t really look or feel like it with the market steadily climbing higher lead by new all-time NASDAQ highs. However, there are still significant economic issues that need mending and we will stick with our strategy. As such the Sector Rotation portfolio is well positioned for the summer doldrums with exposure to defensive sectors and precious metals. Positions in SPDR Gold (GLD), SPDR Consumer Staples (XLP) and iShares NASDAQ Biotech (IBB) are on Hold. SPDR Utilities (XLU) was stopped out on July 9 when it closed just below its stop loss.
Last month’s trade ideas shorting the transports and industrial sectors may not work out this time around. iShares Transportation (IYT) was shorted on July 31 and then quickly stopped out yesterday when it closed above its stop loss. SPDR Industrials (XLI) has not yet traded at either level to establish a short position in. XLI could still be shorted near 74.94 or on a breakdown below 66.35.
Precious metals began to lift off in July. VanEck Vectors Gold Miners (GDX) was added to the portfolio on July 6 and was sold on July 27 when it traded above its auto-sell price for a quick 15.6% gain. GDX has continued to rally with gold reaching new all-time highs. iShares Silver (SLV) was regrettably not added to the portfolio as it failed to trade at or below its buy limit (by pennies) in early July. Last month’s trade in SLV has been cancelled and a new trade has been added. SLV can be bought at current levels up to a buy limit of 27.50. With gold trading at new all-time highs, silver could easily follow and quickly exceed its old highs of just over $50 per ounce.
Please see table below for current advice, updated buy limits and stop losses.
[Almanac Investor SR ETF Portfolio – August 5, 2020 Closes]
Tactical Seasonal Switching ETF Portfolio Update
Defensive, “Worst Months” positions in the portfolio have been doing their job. AGG and BND are positive with gains of 2.3% and 2.4% respectively as of yesterday’s close. AGG and BND are on Hold. Please note, their stop losses have been raised to slightly more than their purchase price. The objective of these positions is to preserve capital while offering a modest dividend.
[Almanac Investor TSS ETF Portfolio – August 5, 2020 Closes]