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]