September 2017 was the start of a monster rally. We can wish for a repeat but it is not likely. I posted a chart last week showing the 411-point S&P rally that started on Sept 11th last year. We can hope for a repeat but the odds of it happening are very close to zero. This was a one-year wonder. This year we have the constant storm cloud of the Chinese trade dispute. It would not take much to turn it into a trade war. That is the risk for the market.

Investors already know the Fed is going to hike rates at the end of September. This news is already priced into the market. The president is suddenly making noises about NOT causing a government shutdown at the end of September because of a lack of wall funding. That is good for the market but I suspect we will see some combination of budget bills and continuing resolutions so that a new battle will appear in November after the elections. If this train of thought continues the market should be positive in October.

The challenge we have is simple profit taking and portfolio restructuring ahead of the normal Q4 rally which typically starts in early October. Portfolio managers wanting to make changes before the end of year rally, do that in September.

We should not be concerned about the market declines last week. This is September and Labor Day week is normally volatile. That does not mean just because that week is behind us that the rally will immediately return. Volatility is likely to continue.

The Dow only lost 0.2% for the week, S&P -1.0%, Russell -1.6% and Nasdaq 2.5%. With the exception of the Nasdaq this was just a normal retracement in an up trending market. The world did not end just because Facebook lost 17 points in five days.

The S&P fell back below 2,900 but remains above support at 2,850. As long as that level holds this is just a consolidation pattern. A decline below 2,850 targets 2,800 and then we can start to worry.

Markets tend to consolidate after making new highs. Nothing has happened to the market that is not normal. Be patient. September volatility is a buying opportunity.

The Dow is maintaining its grip on round number resistance at 26,000 and remains in range for another attempt at uptrend resistance. I like the Dow's positioning between prior resistance, which should now be support, at 25,750 and the uptrend resistance at 26,225. That gives it plenty of room to wander without trading at critical levels. The tariff headlines can bounce it like a yoyo without causing a material break. It is close enough to uptrend resistance that positive news could test that level in a single day.

Apple could be a drag this week if investors begin to worry about the impact of tariffs on iPhone sales. Normally the stock declines after the production announcement so be prepared. Boeing, the most tariff sensitive Dow stock, was the biggest loser once again.

The Nasdaq has shaken some of the FANG weakness but the $8 drop in Apple was a major drag. This has the potential to keep the Nasdaq unbalanced in the coming week. Google (GOOGL) was also a drag with an $88 drop in the last six days. Amazon was hit with a sell the news event when they touched the $1 trillion market cap level and declined $100. Netflix was the least impacted with only a $20 drop on a $370 stock.

If the big caps can recover and pull together next week, the 2% decline could be quickly erased. The 50-day average at 7,826 is likely to be the downside target for the week. That has been support on the last three dips.

The constant decline of the Nasdaq, drop in the chip sector and biotech sector was a major drag on the Russell. The index closed at a 13 day low but it is still well above the prior resistance. The 1,708 level could be initial support.

The most important reports for next week are the producer price index and consumer price index as indications of the rate of inflation. The retail sales report is also important to show us if the recent retail strength is continuing. The NFIB survey on Tuesday was near record levels in the prior report. Lastly, the Apple product announcement on Wednesday will be the biggest stock event of the week. Typically, they decline the week after the announcement but since they are already down around $10 from their high, any further decline could be minimal.

The earnings outlook did not change much over the last week. With 498 S&P companies reported, earnings have risen 24.8% with a 9.5% rise in revenue. This is very strong with 80.1% of companies beating earnings estimates and 72.2% beating on revenue. The long-term averages are 65% and 60% respectively. There have been 75 warnings for Q3 and 38 guidance upgrades. The current forward PE is 17.0. Four S&P companies will report this week but two will be for Q3.

The three recognizable companies are Adobe Systems, Kroger and Dave & Buster's on Thursday and Friday. Most of the others have miniscule volume and microcap values. The earnings date for Adobe is different from what was previously reported in some services as the 28th.

Starting this week, I would recommend looking for some stocks you want to buy and pick a level that works for you. If we get a further decline, I would look to add some long-term positions. I am nearly positive there will be additional volatility in September and early October. Second half market lows are typically made in early October. Do not be overly invested where you are worried about further declines and cannot sleep at night. The easiest way to avoid that is to try and buy stocks on big dips. The right entry point makes it easier to sleep if further volatility arrives.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email