Please take a moment and register for our member’s only webinar, September 2024 Outlook and Update on Wednesday September 4, 2024, at 2:00 PM EDT here:

 

https://attendee.gotowebinar.com/register/205102240968996700    

 

Please join us for an Almanac Investor Member’s Only discussion of recent market action with time for Q & A at the end. Jeff and Chris will cover their outlook for September, review the Tactical Seasonal Switching Strategy ETF, Sector Rotation ETF, and Stock Portfolio holdings and trades. We will also share our assessments of the Fed, inflation, the election as well as relevant updates to seasonals now in play.

 

If you are unable to attend the live event, please still register. Within a day of completion, we will send out an email with links to access the recording and the slides to everyone that registers.

 

After registering, you will receive a confirmation email containing information about joining the webinar and a reminder message.

 

 

8/22/2024: Dow 40712.78 | S&P 5570.64 | NASDAQ 17619.35 | Russell 2K 2150.03 | NYSE 18850.85 | Value Line Arith 10543.45

 

Seasonal: Bearish. September is the worst month of the year for DJIA, S&P 500, NASDAQ and Russell 2000. In election years, September’s overall rank improves slightly to third worst month for DJIA, S&P 500, and NASDAQ, fourth worst for Russell 2000. With the exception of Russell 2000, average performance in election years remains negative. DJIA has the weakest election-year September record, down 11 of the last 18, average loss 0.5%.

 

Fundamental: Adequate. Inflation is slowly cooling, but still above the Fed’s stated 2% target. Unemployment is creeping higher and is currently at 4.3% while apparently 818,000 jobs were revised away earlier this week. Economic growth is slowing and the Atlanta Fed’s GDPNow model is forecasting just 2.0% growth in Q3. Corporate earnings for Q2 were broadly better than expected, but there were still some disappointments. Odds for a soft economic landing still remain favorable but could quickly fade if data weakens substantially or the Fed delays too long. 

 

Technical: Bouncing. DJIA, S&P 500 and NASDAQ have recovered much of the ground lost in late-July and early August but have stalled below previous all-time highs. Early August lows have not been tested yet. Until DJIA, S&P 500 and NASDAQ break out to new all-time highs, a retest of recent closing lows cannot be ruled out. Levels to watch are around: DJIA 38700, S&P 500 5190, and NASDAQ Comp 16200.

 

Monetary: 5.25 – 5.50%. Will the Fed finally cut? Will it be just a small 0.25% or a larger 0.50% decrease. We will likely all find out on September 18, the next time a Fed meeting ends. Without a crisis or some other calamity, we would bet on the smaller 0.25% cut. There did not seem to be much of a rush by the Fed to increase interest rates when inflation was surging. It seems reasonable that the same lack of urgency is likely with inflation slowly declining and still above 2%.

 

Sentiment: Neutral. According to Investor’s Intelligence Advisors Sentiment survey Bullish advisors stand at 50.0%. Correction advisors were at 28.1% while Bearish advisors numbered 21.9% as of their August 21 release. This is a substantial retreat in bullishness from mid/late-July readings and includes a bounce in the percentage of bulls following last week’s gains. Lacking an extreme reading in either direction, sentiment readings currently offer little insight other than the possibility that July’s extreme bullishness marked an interim top. 

 

As we anticipated, the second half of July pullback yielded a rather textbook election year August rally. Today’s selling notwithstanding, it has been quite a course correction from the August 5 lows. The market has been known to succumb to selling toward the end of August as The Street heads for the Hamptons and other getaways for the unofficial end of summer. In fact, we are closing the office next week and taking some time for a little R&R ahead of a likely action-packed yearend market and election season. We will check messages and email though. 

 

September seasonal weakness and Octoberphobia looms large. But we have been hearing a lot of chatter about the seasonal troubles this time of year, so our contrary antennae are purring that perhaps there is just a bit too much negativity. But with the lack of clarity about the economy, the election and the Fed’s next move on interest rates, we still expect some chop and sideways action over the next 60 days or so with a likely test of the lows. But another steep August-October correction three years in a row is less likely. 

 

Bullish election forces remain at play, but September and October are two of the worst months of election years – even excluding 2008. October is the worst month of election years for DJIA, S&P 500 and NASDAQ. NASDAQ has been up only four times in election year October since 1971 and down the last four straight. Since 2000 DJIA is up only one out of six in both election year September and October, S&P is up twice in election year September and once in October. While we do not expect anything sinister it is comforting to have Almanac Investors defensively positioned ahead of this notoriously volatile timeframe.

 

 

It’s interesting how the obscure preliminary estimate of an upcoming annual benchmark revision to the employment statistics number appears to have spooked the market the past two days. Well, when it’s an adjustment of 818,000 jobs and the biggest since 2009 that’ll get your attention. It sure makes you wonder that maybe the job market hasn’t been as resilient as we were led to believe. How can we trust these stats if this revision is so large? We’ve been dubious of government statistics for years. Cases in point: Stock Trader’s Almanac 2024 page 32 “How the Government Manipulates the Economy to Stay in Power,” and our book Super Boom: Why the Dow Will Hit 38,820… (Wiley 2011) Chapter 9 “Inflation.”

 

This revision clearly gives the Fed cover to cut rates ahead of the election. We still believe we will only get a quarter point cut in September and the CME futures agree. And likely another one or two 25bp cuts this year, not the new overly aggressive rate cuts the fearmongers are perpetuating. 

 

What we see here in the NY Metro area is plenty of hustle and bustle. I-95 is jammed all the time these days and so are the New York State Thruway, Garden State Parkway and New Jersey Turnpike. There was plenty of traffic going to and coming back from Newark Airport last weekend. Lots of folks heading “down the shore” too. The famous Asbury boardwalk was packed, the beaches crowded and long waits for tables at restaurants. Clearly the economy is not as rosy as the cheerleaders say. But it’s also not as dire as the naysayers. Perhaps the economy would be considered modestly satisfactory. There are clearly weak spots, but it is not falling apart either. Maybe we should call this the not-so-soft landing where there’s a little turbulence on touchdown.

 

 

With all that has transpired in the past month, patience and prudence are clearly in order. At today’s close DJIA is still above 40,000 and up 8.0% year-to-date. S&P 500 is up 16.8%, NASDAQ is up 17.4% and while lagging and not hitting an all-time high in 2 years and nine months the Russell 2000 is up 6.1% this year. While market conditions may seem a bit tumultuous at the moment let’s remember how far we have come this year. 

 

In the past month President Biden dropped out. We had a below average mid-July to early August election year drawdown of 8.5% on the S&P and 13.1% on NASDAQ, culminating in a mini flash crash and turnaround on August 5. Now the steep snapback rally that brought us to within striking distance of the all-time highs looks like it’s run its course. 

 

The market’s convention bounce may already be yielding to the realities of an uncertain election with all the gyrating economic data coming in, speculation on what the Fed will say at Jackson Hole and do at their next FOMC meeting on September 18 and other rhetoric swirling around The Street and financial media. Seasonality is coming into its historically weakest period of the year while geopolitics remains tense in Russia and Ukraine, the Mideast and the Pacific Rim. But macrotrends, technicals, internals, the US economy and election year forces remain supportive. So be patient, we are well positioned and ready for the fatter pitch later in Q3 or early Q4.

 

 

 

Over the last five weeks DJIA endured a rollercoaster ride. From DJIA’s all-time closing high of 41198.08 on July 17 through its closing low of 38703.27 on August 5, it shed 6.1% and from that low to its recent high close on Monday August 19 at 40896.53 it climbed 5.7% (1). S&P 500 and NASDAQ endured even larger swings. Market volatility has historically begun to pick up after mid-July and it certainly was the case this year as the VIX (CBOE Volatility index) spiked over 50 in early August. 

 

DJIA recovered the bulk of its recent losses and VIX has retreated back under 20, but resistance appears to loom near DJIA’s previous high as positive momentum has faded. As of the close on August 21, both the faster and slower moving MACD indicators applied to DJIA remain positive (2). Without a breakout to new highs, a few more trading days of sideways and/or weaker trading could turn both MACD indicators negative and confirm the loss of positive momentum.

 

 

DJIA’s weekly streak without a Down Friday/Down Monday (DF/DM) ended with a thud at 15. The DF/DM also contributed to the end of DJIA’s four-week winning streak (3). Thus far, DJIA has avoided any additional meaningful weakness after the DF/DM, but with historically weak September and October just around the corner there is cause to remain vigilant and not rush to jump back into long positions.

 

Anticipated weakness after mid-July was notably stronger for S&P 500 (4) and NASDAQ (5) as they declined four weeks in a row before last week’s strong rebound. That rebound was the best weekly gain for S&P 500 and NASDAQ since the week ending November 3, 2023, when they gained 5.85% and 6.61% respectively. Another nine-week winning streak like the one that followed last November’s weekly surge is not likely as election uncertainty and Fed rate cut anticipation are likely to keep market volatility elevated in the near-term.

 

Weekly market breadth data remains rather mixed. NYSE Weekly Advancers did outnumber Weekly Decliners by a solid margin last week as one would expect (6), but in the second half of July Weekly Advancers exceeded Weekly Decliners as S&P 500 and NASDAQ declined. The mixed weekly breadth readings are likely due to the rotation out of tech and high-growth names into more interest rate sensitive stocks as longer-dated rates retreat.

 

Weekly New Highs and Lows over the past four weeks also appear to support the rotation theme as New Highs held up until the second week of August. New Lows did pick up, but the increase was generally consistent with the magnitude of the market’s retreat. Last week’s numbers for New Highs and Lows (7) trended in a positive direction with New Highs expanding and New Lows shrinking. Whether that trend can continue and build momentum remains to be seen.

 

With a September Fed rate cut seemingly nearly certain, yields on the 90-day Treasury and 30-year Treasury continued to decline over the last four weeks (8). The 30-year yield is at its lowest level since the start of the year while 90-day yield is at its lowest since last June. Falling interest rates should give the consumer some relief which does not hurt the probabilities of a soft economic landing.

 

 

Portfolio managers back after Labor Day tend to clean house in September. Since 1950, September has been the worst performing month of the year for DJIA, S&P 500, NASDAQ (since 1971), Russell 1000 and Russell 2000 (since 1979). September was creamed four years straight from 1999-2002 after four solid years from 1995-1998 during the dot.com madness. More recently, DJIA, S&P 500, NASDAQ, Russell 1000 and 2000 have been down seven of the last ten Septembers and the last four straight. Average losses over the last ten years range from –1.5% by DJIA to –2.9% from NASDAQ.

 

Even though election years have historically been solid years, this tendency appears to have little to no impact on September’s abysmal performance. September’s ranking in election years does improve slightly but remains in the bottom third. Average performance remains negative with the exception of Russell 2000 gaining +0.4% on average since 1980.

 

 

Although the month used to open strong, S&P 500 has declined nine times in the last sixteen years on the first trading day. With fund managers tending to sell underperforming positions ahead of the end of the third quarter there have been 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%), U.S. debt ceiling debacle in 2011 (DJIA –6.0%) and during the post-covid bear market in 2022 (DJIA –8.8%).

 

 

September Quadruple Witching week is generally bullish with S&P 500 advancing nearly twice as many times as declining since 1990 but it has suffered some sizable losses and been down five or six years in a row depending on index. Quadruple-Witching Friday was essentially a sure bet for the bulls from 2004 to 2011 but has been a loser nine or ten of the last twelve years, depending on index with S&P 500 weakest, down 11 of the last 12. The week after Quadruple Witching has been brutal, S&P 500 down 27 of the last 34, averaging a loss of 1.06%. In 2022, DJIA, S&P 500, and NASDAQ all dropped 4% or more.

 

Labor Day has become the unofficial end of summer, and the three-day weekend is 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 Wednesday after the holiday as opposed to the days before. DJIA has advanced on 21 of the last 29 Wednesdays following Labor Day. Tuesday after Labor Day also leaned bullish, but DJIA has declined 12 of the last 16 (down the last 7 straight).

 

 

 

Considering the heightened market volatility over the past week let’s take a step back and calmly evaluate market conditions. Election year drawdowns happen. In the table below the average election drawdown for S&P 500 is 13.4% since 1952 and 21.2% for NASDAQ. At the August 5 lows S&P was down 8.5% and NASDAQ was off 13.1%. This is well within the range of historic election year drawdowns and less than the average drawdowns of 13.4% for S&P and 21.2% for NASDAQ.

 

 

We’ve been warning of a mean reversion pullback for this overextended market running on AI-boom fumes. The selloff may have been a little faster and more furious than we anticipated, but nevertheless high-flying stocks and the market got their comeuppance. While the market has staged a bit of a bounce back, we suspect the correction is not over. 

 

The support levels we highlighted in the August Outlook two weeks ago for the S&P 500 of 5190 and NASDAQ of 16500 have been breached, which suggests we could test the April lows (S&P 4954/NASDAQ 15223), which would be a 12.6% correction for S&P and 18.4% for NASDAQ. This is just shy of the average election year drawdowns in the table above. 

 

The mid-July pullback we expected arrived right on cue. This pullback and the market’s steep trajectory bring into consideration the uneasy comparison to 1987 as you can see in the chart below. This is not to say we expect a 1987-style crash or market action in 2024. We don’t. It can’t happen with the circuit breakers now in place. Plus, as illustrated in the chart below the 1987 market was much more extended than 2024. Q1 1987 S&P was up 20.5% while up 10.2% in Q1 2024. At this juncture in 1987 S&P was up over 35% year-to-date. At the high this year S&P was up 18.8%.

 

 

The 1968 analog is the one that’s calling out to us now. Both are election years with a democratic sitting president that dropped out of the race and democratic convention in August in Chicago. There are many other, economic, market, political and geopolitical comparisons we can draw, but most important to us is that the market in 2024 is now closely tracking the 1968 trend, especially after the recent selloff. We’ll be keeping a close eye on this.

 

 

While the market may have overreacted, this sort of pullback is overdue and likely not over. August-October seasonal weakness is clearly in play and the action over the past two weeks brings our Open Field Election Year Pattern back in play as well (see chart below). This does not mean we are heading into the red for the year, but it does suggest the market may struggle over the next few months during the seasonal weak period and leading up to this now more uncertain election. But remember since 1952 there have been “Only Two Losses Last 7 Months of Election Years” (see 2024 Almanac, page 80).

 

 

 

Over the past three weeks through yesterday’s close (August 7), S&P 500 sank 7.0% while Russell 2000 dropped 9.1% higher. Over the same period the entire stock portfolio slipped 3.3% excluding dividends, interest on cash, and any trading fees. An increasingly large cash position (due to positions being closed out when stops were triggered) helped buoy the overall portfolio. Every market capitalization slice of the overall portfolio did take a hit from broad market weakness. Large caps show the least amount of damage, down 3.9% since last update, small-caps were second worst, off 10.1% while Mid-caps got slammed, down 13.7%.

 

While numerous positions did decline, Super Micro Computer (SMCI) was responsible for just slightly less than half of the total portfolio decline over the last three weeks as it fell from over $800 to under $500. Given the lofty gains and earnings expectations of SMCI (and AI stocks in general), it was not much of a surprise to see it sell off. We had already taken profits in SMCI twice. The first time was when it doubled from its original price and a second time when it was trading around $900 in the first half of April. SMCI may have missed earnings estimates, but earnings were still up 78.1% compared to one year ago while revenues leapt 143%. When earnings were released, SMCI also announced a 10-for-1 stock split which is expected to be completed on October 1. Despite the recent sell off, AI is not going away, but until market volatility cools, SMCI is on Hold.

 

Another significant slice of the recent portfolio decline was the result of an earnings miss by Cbiz (CBZ). Shares had jumped higher in early July to over $85, but weaker than expected revenue, earnings, and margins reported on July 31 quickly erased the gains. CBZ closed below its stop loss on July 31 and was closed out of the portfolio for a 23.5% gain excluding any dividends or trading fees.

 

Also getting stopped out in late July was nVent Electric (NVT). Although not directly an AI stock, it had benefited from all the excitement with shares climbing above $85 in late May from around $56 in mid-January. However, that is where that run appears to have ended as NVT mostly drifted sideways and lower until mid-July when it began its retreat in earnest. NVT closed below its stop loss on July 30 and was closed out for a 38.4% gain excluding the usual fees and any dividends. NVT’s earnings released earlier this week also failed to meet expectations.  

 

On a positive note, InterDigital (IDCC) reported better than expected results on August 1 and raised its guidance. The “surprise” earnings and revenue beats helped IDCC avoid the mini market meltdown earlier this week and it has gained 10.6% since last update. With analysts scrambling to update their forecasts, IDCC is on Hold.

 

It wasn’t a major move, but AT&T (T) also managed to post a modest gain over the last three weeks and continues to slowly climb back to our breakeven mark (excluding dividends). T was originally added for its dividend yield and now that the Fed appears to be ready to start cutting rates, that yield is likely looking attractive once again to some. Hold T.

 

All remaining positions not mentioned above are on Hold. Please see table below for updated stop losses.

 

 

In case you missed the member’s only webinar on Wednesday, the slides and video recording are available here (or copy and paste in a new browser window: https://www.stocktradersalmanac.com/LandingPages/webinar-archive.aspx). In the webinar we reviewed key seasonal pattern charts that we have been tracking throughout the year, current GDP and inflation trends, Fed interest rate expectations, and what we expect during the balance of the “Worst Months.”

 

 

In the original research conducted by our illustrious founder and creator of the Stock Trader’s Almanac, the late Yale Hirsch, he defined a “Hot July” market as a gain of 3% or more for the Dow. Today’s carnage notwithstanding, sizable gains yesterday on the last trading day of July buoyed DJIA to a 4.4% gain for July 2024.

 

Every DJIA “Hot July” since 1950 was followed by a retreat that averaged 7.0% from July’s close to a subsequent low in the second half of the year. The worst decline was 32.4% in 1987 while the mildest DJIA decline was 0.1% in 1958. Historically, “Hot Julys” have led to better Autumn buys as many of the subsequent lows occurred in September and October.

 

 

NASDAQ closing down 0.75% for the month and S&P 500 lagging DJIA up just 1.1% underscores our near-term outlook for increased volatility from August to October ahead of this unprecedented presidential election campaign season on the backdrop of a market itching for a Fed rate cut and erratic economic, employment and inflation readings. The past two days’ action are a case-in-point.

 

As noted in our August Almanac and Outlook over the past two weeks and on yesterday’s webinar, notoriously week August is historically much better in election years. However, with the market running hot all year, arguably overbought and way ahead of itself, our cautious stance during the “Worst Four Months” of the year July-October seems the most prudent course of action. Our “Best Months” MACD Seasonal Sell signals on April 2 for DJIA and S&P and June 25 for NASAQ appear to be rather timely at this point.

 

 

Two new bullish sector trades begin in August, but we are going to take a cautious approach. New long trade ideas are suggested on dips. If they do not dip below their respective buy limits, that is fine as we can consider them again when the “Worst Months” end. August has been better in election years, but this August has gotten off to a tough start with some weaker than expected economic data that has only added to already volatile trading.

 

The biotechnology sector enters its historical favorable season in August. iShares Biotech (IBB) could be considered on dips below a buy limit of $140.25. A stop at $123.77 is suggested. The auto-sell price is $205.01 based upon historical average performance plus an additional 20%. A 21.8% average gain has occurred over the last 25 years while an average gain of 4.4% has occurred in the most recent 5 years (page 94 STA 2024) from the beginning of August through the beginning of March. Top five holdings are: Gilead Sciences, Regeneron Pharmaceuticals, Vertex Pharmaceuticals, Amgen, and IQVIA Holdings.

 

 

Over the last 25 years, Info-Tech has generated an average return of 11.8%, and for the last five years the average has been a solid 7.2% during its bullish season from mid-August to mid-January. Our top ETF within this sector is iShares US Technology (IYW). Set a buy limit at $131.00 and an initial stop loss of $115.61 if purchased. Should high-tech produce above average gains, profits can be taken at the auto-sell price of $175.72. IYW’s top five holdings are: Apple, Microsoft, Nvidia, Meta, and Broadcom. These five holdings represent 51.13% of IYW’s total holdings. 

 

 

August’s final new trade idea is a short trade in the Semiconductor sector. Over the past 25 years the Semiconductor index (SOX) has declined on average 7.5% from the middle of August through the end of October. More recently, over the last five years this trade has been nearly as successful with an average 7.1% loss. AI expectations have fueled the sector substantially higher, but the costs of developing and rolling out AI are becoming worrisome. After an initial seemingly unlimited spending spree, demand for anything and everything AI could begin to cool. If lofty expectations are trimmed, then stretched valuations could also quickly normalize as share prices decline.

 

We are going to avoid using a leveraged, inverse ETF and instead consider establishing a short position in iShares Semiconductor (SOXX) on a breakdown below $215.25. If shorted on a breakdown set an initial stop loss at $235.50. Top five holdings of SOXX are: Broadcom, Nvidia, Advanced Micro Devices, Applied Material, and Qualcomm. Broadcom is the top holding in SOXX and the fifth largest holding in IYW. If SOXX is shorted, it is not anticipated it will be held for any longer than its seasonally weak period that ends before Info-Tech’s bullish period.  

 

 

 

The summer doldrums and the worst two-month span (August-September) of the year have arrived. Already the market has begun to exhibit some seasonal weakness after a “Hot July.” Last month’s trade ideas shorting the transport and industrial sectors have not been added to the portfolio. iShares Transportation (IYT) can still be shorted on a breakdown below $63.23. SPDR Industrials (XLI) can also still be considered on a breakdown below $119.62. For tracking purposes, IYT and XLI will be added to the portfolio if they close below their respective breakdown prices.

 

VanEck Gold Miners (GDX) and SPDR Gold (GLD) have both been added to the portfolio. GDX and GLD both opened below their respective buy limits on July 25 and traded the day under them. As a result, both were added to the portfolio using their average daily price on July 25. GDX and GLD can still be considered on dips below their buy limits.

 

Holding SPDR Energy (XLE) with a tight trailing stop loss was effective in capturing some additional upside. XLE was stopped out on July 19 when it closed below its stop loss. XLE was closed out the following day for a 13.0% gain excluding dividends and trading fees. 

 

Easing long-term interest rates has aided our “Worst Months” defensive positions, XLP and XLU. XLU was up 15.4% at yesterday's close and is on Hold. XLP can still be considered on dips. SPDR Healthcare (XLV) never traded below its buy limit and has run away. The defensive trade in XLV is Cancelled.

 

 

 

Sliding long-term yields have also aided TLT, AGG and BND. AGG and BND positions are officially half positions originally established in April. TLT was officially added to on July 22 when it traded under $92.50. TLT’s “Presented Price” has been updated to reflect the purchase of additional shares at a higher price. TLT, AGG and BND are on Hold.

 

Since issuing our Seasonal MACD Sell for DJIA and S&P 500 in early April, our preference has been short-term bond ETFs like or similar to SHV and SGOV. Money market funds are also acceptable choices should your options be limited. SHV and SGOV can still be considered at current levels.

 

 

Disclosure note: Officers of Hirsch Holdings Inc hold positions in SGOV, SHV & XLU in personal accounts.