- Volume should be lighter than normal as we lack any strong economic data points as well as scant earnings reports.
- If recent history were any guide, expect September to be a rocky month. On average, it’s the worst performing month of all-time.
- While the indexes closed lower in typical August form, the pullback was very orderly and very normal. We even ended the month with a strong week.
YOUR WEEKLY ROADMAP
Welcome back from the long weekend!
A shortened, end of summer, four-day work week awaits us and may give the market a chance to chill out for the time being. Volume should be lighter than normal as we lack any strong economic data points as well as scant earnings reports.
Yet as you’ve probably heard time and again, September tends to consistently bring one thing with it - volatility and results that tend to underperform.
September Mourn? If recent history were any guide, expect September to be a rocky month. On average, it’s the worst performing month of all-time. Over the last 20 years it has fallen an average of -0.5%. Will the seasonal pattern continue? Maybe, but current set-ups look to favor the bulls.
Poking more holes in the bear narrative. While the indexes closed lower in typical August form, the pullback was very orderly and very normal. We even ended the month with a strong week. As stated here time and again, we get 5% pullbacks in the S&P 500 three times a year on average.
Well guess what? The sell-off from peak to trough in the index last month was -5.8%. The second such >-5% retracement this year. Normal stock market behavior.
The S&P 500, above, held crucial technical support levels and even broke back above a key one as seen in the 50-day moving average. The rally was confirmed by positive signals in the RSI as it moved above its midline and a bullish crossover in the MACD. These are not bearish developments.
Sector Weakness. The telling sign to me was the sector leadership we continue to see. Or in the case of August, what didn’t lead. The two worst performing sectors in August (chart below) were Consumer Staples and Utilities. This is significant because if there was a panic or a true bearish narrative these defensive sectors would have led, not lagged.
August Sector Performance
As for August, only Energy thrived as it gained 4.2%. Nine of 11 sectors finished lower as Healthcare was able to eke out a small gain to end the month.
Sector to Watch - Semiconductors (SMH)
This index has been the toast of the town so far in 2023. The AI story has fueled it to new heights. Yet, it has been stuck in a range and reaching a very interesting inflection point worth watching.
Given recent new all-time highs in two of its biggest three components in Nvidia (NVDA) and Broadcom (AVGO) one would expect to see new highs in the SMH. However, a reversal on a failed break-out from AVGO and failure to recapture all-time intraday highs in NVDA may end up taking the SMH lower. These possible failed rallies in two of the sector’s biggest components are worth watching this week.
The index appears to have put in a double top at the $161 level and then failed to test those heights during the strong rallies in both NVDA and AVGO. A retreat into the weekend has the index trading just above a flattening 50-day moving average. It lacked positive follow through and appears toppy. It could test the lower end of its range within weeks.
Earnings. It’s a yawner, but we can always find a few stocks worth watching.
Stocks in Focus…
Zscaler (ZS), the San Jose based cybersecurity company, seemed to turn things around after its last quarterly report. They issued positive guidance in May and exceeded that guidance when they reported in June. Shares popped 58% over that May-June stretch and are now up 41% for the year.
However, price action has been sloppy. It struggles to climb above the $163/$164 level and makes new lows on each pullback. The good news is that they are reporting after successful quarters from their peers Palo Alto Networks (PANW), Okta Inc (OKTA), and CrowdStrike (CRWD).
Can they ride the recent earnings momentum within the sector? We will find out after the close on Tuesday.
C3.AI (AI) focuses on devolving, deploying and operating enterprise operations. The Redwood City, CA company is one of the few pure play AI companies trading and has seen shares go on a major roller coaster ride over its three years as a publicly traded company.
Shares peaked in December 2020 at $183.90 and had been declining until January 2023. This year has been all about the climb back. Shares are up 179% YTD, but still down 79% from all-time highs.
The stock is volatile on earnings day with implied volatility of +/-17%. It has traded lower after five of its last 8 reports. Shares have been consolidating between $28.50/$33.50 lately. This level was a strong resistance zone during the first quarter and now it acts as support.
Some may argue it's a healthy pullback given its YTD rally. Others may say it's on the verge of breaking down and the AI run has reached its peak. So watch this zone closely. We could find out which way price resolves itself in this zone when they report after the bell on Wednesday.
DocuSign (DOCU), the electronic signature solution company that went parabolic during the Covid pandemic, looks to build off some recent momentum and reverse its longer term downtrend.
The stock has fallen 33% from its yearly high set back in February. The stock is down -6.8% year-to-date and trading near its lowest levels.
Technically, as seen in the chart above, the stock continues to trade slightly lower to sideways and below its 200-day moving average. It has struggled to break its longer term downtrend and hopes it can when it reports on Thursday afternoon.
The stock tends to have huge moves on earnings days. The circled candle above is an example. It gapped up on a positive report and then reversed to finish down -2.5% on that day. So be careful trading this stock.
Its one day implied volatility is +/- 11.3%. Over its last seven quarterly reports the stock has closed -2.5%, -22.9%, +12.4%, +10.5%, -24.5%, -20.1%, and -42.2% respectively. Given past results, expect extreme volatility.
Economic Calendar
Wednesday - U.S. Trade Deficit 8:30, ISM Services 10:00
Thursday - Initial Jobless Claims 8:30
THE WEEK THAT WAS
Last week bad news became good news again and stocks surged to end the month. In fact, activity across all indices was quite positive for the bulls.
The S&P 500 had its best day since June 2nd on Wednesday and closed the week up by 2.5%. The US dollar weakened and fell the most since July 13th. Yields in both the 2-year and 10-year treasury retreated from key technical levels and the VIX dropped back to below 14.
Economic Data. Jerome Powell said at the Jackson Hole Economic Symposium that the Fed would take things one economic data point at a time when it came to future rate decisions. Well we got a ton of data that the market liked last week.
The unemployment rate got to its highest level since February, 2022. While historically low, it showed a softening in a tight labor market which implies that the Fed’s rate hikes are having their desired impact. A gradual rise in unemployment gives credence to their “soft-landing” narrative.
Other jobs data, including revisions to prior reports, showed signs of an easing economy. The ADP number was cooler than expected. Nonfarm payrolls grew slightly in August with 187,000 jobs added versus an expectation of 170,000. However revisions to June and July were both lowered and that offset the August beat.
Visa (V) and Mastercard (MA). Last week the Wall St. Journal. reported that Visa and Mastercard plan to increase the fees they charge merchants for processing credit card payments by more than $500 million.
Add that news to the higher rates they have been able to charge on top of the growing rise of record level credit card debt and both companies are poised to see revenues grow.
Shares of both stocks (5-year chart above) reached 52-week highs last week. In the case of MA, they reached all-time highs, while V is just a mere $2 away from that threshold as well as a major technical breakout.
Heat Map. So much for August being a major downer. Yes, all but one sector finished lower for the month, but the end to the month was quite encouraging as seen in last week’s heat map.
Keep an eye on the Materials sector which has been silently adding to its 2023 gains. As for the laggards, they included Utilities, Staples and Healthcare.
STOCKS IN THE NEWS
Hawaiian Electric (HE) fought back against the many lawsuits claiming they were responsible for the nation's deadliest wildfire in the last century. They claimed that they have records showing that they shut off power hours before the wildfires began.
The investigation is ongoing. Shares jumped by over 40% on Monday when this news broke. Despite this week’s massive move higher (up 56%), shares are still lower by 58% since the wildfires began.
Dell Technologies (DELL). Remember Dell? Well looks like they are back in a big way. The company posted earnings results that beat the street and sent shares up over 20% for its best day ever since returning to the public markets in 2018.
On top of the good report, Morgan Stanley reiterated their buy rating, raised their target and called it its top pick in IT hardware replacing Apple. Shares are trading at all-time highs and up 69.5% year-to-date.
Walgreeen’s Boots Alliance - CEO Rosalind Brewer stepped down from her role after less than three years at the helm. Shares of the Dow Jones Industrial Average stock under Brewer have fallen over 50% during her tenure.
Despite a change in leadership, which often leads to a brief turnaround in the stock’s price, shares continued to decline. The stock is trading at its lowest levels since 2009 and it wouldn’t be shocking to see it get booted from the Dow next.
MARKET STATS
It was a great week in a seasonally challenging time. All indexes were up on the week despite all finishing August in the red. The Nasdaq 100 had its best week of the month with a 3.7% gain and is now back near 52-week highs
The Dow continues to be the laggard with only a 5.1% gain year-to-date. All of the key index leaders’ results are listed below.
August Index Winners and Losers
SECTOR WATCH
Technology (XLK) made a big comeback thanks to nice rebounds in both shares of Apple and Microsoft. However Materials (XLB) gained 3.7% and is now up over 7.5% YTD and starting to make a move.
The laggards again continue to be Staples (XLP) and Utilities (XLU). These are the sectors that tend to perform the weakest in a stronger overall market.
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