Market Outlook
The prospect of rising interest rates sent the stock market
to its first weekly loss since early August. Contributing to investors’
skepticism was a report showing retail sales in August rose more than
economists had forecast. That reinforced expectations that the Federal Reserve
could start hiking interest rates sooner than expected. All the major equity
indexes are in positive territory for the year. Most analysts expect these
gains to hold up into year end, even there might be a pause or slight pullback
along the way.
According to the Stock Trader Almanac Monday of September
options expiration week is bullish for DJIA and S&P 500 although major
shellacking’s in 2001 and 2008 pull the day’s average gain since 1982 negative.
NASDAQ’s record is much weaker on Monday, declining 20 times in 32 years.
Moving forward to September option expiration day, it is generally bullish and
has improved recently with DJIA up eight of the past ten years with an average
gain of 0.5%. S&P 500 and NASDAQ have nearly identical recent track
records. Full-week performance has a somewhat spotty record over the last ten
years for DJIA, up six and down four. However, S&P 500 and NASDAQ have
fared better, both have gained in nine of the past eleven years.
We feel compelled to regurgitate analysis from the past few
weeks because it is playing out as advertised “…It has been reported that since 1950, September is the worst
performing month of the year for the major stock indexes, a majority of
analysts feel the August lows will maintain as support for the remainder of the
year…Don’t be surprised if September starts strong as it has in thirteen of the
last nineteen years. But the market begins to fade as money managers’ start
selling off losers and repositioning assets for the end of the third quarter
window dressing…”As we said, September started strong with the major
indexes reaching record highs, but they started selling off finishing with a
weekly loss for the first time in over a month. Recent market highs were
generated primarily on the strength high flying biotechnology shares. As
displayed in the updated quarter-to-date chart below, other than technology and
maybe financials, other market sectors are starting to struggle. It is
reasonable to expect market weakness heading into upcoming earnings season.
Notice declines were led by utility companies and other stocks that pay high
dividends. Those stocks have been in favor this year as investors hunt for
other sources of income because bond yields have been low.
Investor Analysis
The Stock Traders’ Almanac says that historically speaking
September weakness has been a great time to load up on stocks ahead of the
“Best Six Months” of the year, November to April and an even better time in
midterm years ahead of the best two consecutive quarter span of the
four-year-presidential-election cycle. The market’s sweet spot of the
Four-Year Cycle begins in the fourth quarter of the midterm year. The best
two-quarter span runs from the fourth quarter of the midterm year through the
first quarter of the pre-election year, averaging 15.3% for the Dow, 16.0% for
the S&P 500 and an amazing 23.3% for NASDAQ. Pre-election Q2 is smoking
too, the third best quarter of the cycle, creating a three quarter sweet spot
from midterm Q4 to pre-election Q2. Appling these average gains to yesterday’s
closing prices puts DJIA at 19675, S&P 500 at 2315 and NASDAQ at 5656 at
the end of Q1 next year. But, considering the markets recent run and the
specter of rising interest rates, a mid- to high-single-digit advance is
probably more likely between now and the second quarter of 2015. A recent
graphic is worth repeating
By Gregory Clay
Investment Strategist
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