Wake Me Up When September Ends

I don’t know which direction stocks are headed next. No one does for sure. But whether your portfolio is positioned for equities to rocket higher or prepared for impending doom, it’s always important to understand both the bull and bear cases. By understanding where the risks to your thesis are, you’re more likely to know when your thesis could be wrong, and how to take corrective action.

We’ve been decidedly bullish on US stocks since the spring, when the S&P 500 cleared a key resistance area near 4100. With the index above that level, we argued, the higher probability outcome was for more gains. Stocks rallied sharply throughout June and July.

At the outset of August, with interest rates rising and the Dollar showing renewed strength, we grew somewhat wary:

Stocks are still clearly in an uptrend, which means we still want to be looking for stocks to buy. But with headwinds mounting and stocks near logical areas of resistance, we want to be more cautious until we see some resolutions.

Nearly two months later, we have yet to get those resolutions – at least, not the resolutions we’d hoped for. The S&P 500 is stuck below a familiar level. In September 2021, the index was rejected at 4500. That same spot was support a few months later, then acted as resistance again in early 2022. That level has some historical significance, too. It’s the 423.6% Fibonacci retracement from the entire 2007-2009 decline.

The NASDAQ Composite has been similarly rejected. The area near 14200 was a key rotational level throughout 2021 and 2022, acting first as resistance, then support, then resistance again. An August/September retrenchment couldn’t have started from a more logical level.

Unfortunately, we have gotten resolutions elsewhere in the market. Long-term Treasury rates are at their highest levels since 2007 after surpassing the peaks set last fall, around the same time that stock prices bottomed:

And the US Dollar just wrapped up its tenth straight week of gains. It started with a failed breakdown to new 52-week lows over the summer. As is often the case, that failed move resulted in a fast move in the opposite direction. Now, we’re testing the highs of the year.

Last year, interest rates and currency moves were the only thing that mattered. Each time the yields rose and the Dollar moved higher, equity prices dropped to new lows. That relationship is back in full force.

Interest rates are screaming higher, and the Dollar is on a near-unprecedented run. Last year’s biggest bear market headwinds have returned with a vengeance. Unsurprisingly, stock prices have fallen.

But this is September, what’s historically been the weakest month of the year. Stocks are supposed to fall in September. Given all that, what’s more surprising is that we’re down only 6% from the year-to-date highs.

That means each the S&P 500, the Dow Jones Industrial Average, and the NASDAQ Composite are still above their 200-day averages. The truth is, things just aren’t that bad out there. Could they get bad? Absolutely. But they aren’t falling apart yet.

Let’s see how things look once we get past this period of seasonal weakness. Let’s see how the Dollar responds to the March highs. Let’s see if rates can sustain the breakout.

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Then, if things don’t improve, maybe the bears will really have their day in the sun. They’ve got plenty to hang their hats on so far. Breadth is weak. Just 39% of S&P 500 stocks are still above their 200-day moving average, and less than half that many are above the 50-day.

New lows have expanded, too.

And everyone knows the fundamental landscape is uncertain. The strong consumer that’s fueled the last decade of economic expansion is facing higher interest rates, a resumption of student loan payments, and dwindling savings. Meanwhile, equity valuations are well above historical norms, even if we do manage to get the margin-fueled earnings recovery analysts are expecting over the next 2 years.

Even with stocks just off their highs, the big, bad bear case isn’t hard to understand. Now we need to see follow-through.

Wake me up when September ends.

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