Traders Succumb

Traders Succumb to September Market Fears

by Louis Navellier

September 13, 2016

*All content in the Marketmail Introduction is the opinion of Louis Navellier of Navellier & Associates, Inc.*

Friday, the previous two months (43 trading days) of sub-1% daily S&P 500 moves ended with a bang as the index declined a whopping 2.45% by day’s end. Traders seemed to fear anything and everything. Some Wall Street traders were trying to dump their inventory of stocks heading into the 9/11 anniversary weekend because they expected (without evidence) a new terrorist attack on Sunday (9/11).

Half Full Half Empty Aphorism Image

Even in business news, pessimism ruled. For instance, the talking heads on the business channels were debating the release of the new iPhone 7 and the more water-resistant iWatch, but they seemed to be stressing out over how the iPhone removed its headphone jack in an attempt to have a cleaner design.

Another excuse for selling stocks on Friday was the fear of an interest rate hike when the Federal Open Market Committee (FOMC) meets next week; but my guess is that the Fed won’t raise interest rates next week, due to the recent subpar economic data and the most bearish Beige Book that I can remember – citing “moderate” growth and “slight” overall inflation. In addition, the Institute of Supply Management (ISM) reported on Tuesday that its service sector index declined sharply from 55.5 in July to 51.4 in August, the lowest reading in 6 1/2 years. The new orders component declined to 51.4 from 60.3 in July.

Meanwhile, the European Central Bank (ECB) announced on Thursday that it is maintaining its negative interest rate policy (with a key interest rate set at -0.4%) and quantitative easing of 80 billion euros ($90 billion) per month. In short, both the ECB and Fed are refusing to admit that lackluster economic growth and falling commodity prices are fueling serious deflationary forces, which they are not prepared to fight.

In This Issue

Our columnists will dissect Friday’s market action in more detail, while keeping an eye on history. Bryan Perry dissects the flip-flop Fed chatter leading up to next week’s FOMC meeting, while Gary Alexander looks at market action after 9/11 and other huge “black swan” events. Ivan Martchev updates the failed “short of the century” forecasts of recent years, while Jason Bodner looks at our fixation on negative over positive outcomes. My “Look Ahead” will focus on the dangers and opportunities of the current market.

Income Mail:
Market Tumbles on Perceived Risk of Rising Rates
by Bryan Perry
Our “Flip Flop Fed” Triggers a “Sell First” (Think Later) Reaction

Growth Mail:
September Continues to Haunt Wall Street
by Gary Alexander
Remember Brexit, Grexit, Sequestration, and the Financial Cliff?

Global Mail:
The “Short of the Century” Has Even Longer to Work Out
by Ivan Martchev
The China Factor in U.S. Interest Rates

Sector Spotlight:
We Fear “Perfect Storms” but Ignore Clear Blue Skies
by Jason Bodner
Weekly, Quarterly, and YTD Winners and Losers

A Look Ahead:
Financials and Energy Are Still the Most Dangerous Sectors
by Louis Navellier
What to Expect in Late-September’s “Window Dressing” Season

Income Mail:

*All content in "Income Mail" is the opinion of Navellier & Associates and Bryan Perry*

Market Tumbles on Perceived Risk of Rising Rates

by Bryan Perry

The stock market ended an otherwise flat week on a sharply lower note as rising interest rates spurred selling in the broader market. The three major indices (Dow Jones Industrials, S&P 500, and NASDAQ) each ended the week with losses between 2.2% and 2.4%. Global markets tilted to the downside as participants responded to a negative set of economic data and news that North Korea carried out another nuclear test.

However, these negative headlines failed to elicit a bid in the bond market, due largely to the angst over Thursday’s policy statement from the European Central Bank and new Fed funds rate hike expectations.

The ECB released its September policy statement last Thursday, holding its monetary policy stance steady. The central bank opted to keep its key interest rates at record lows while maintaining the size and scope of its asset purchases. Furthermore, ECB President Mario Draghi struck a hawkish tone, indicating that the Governing Council didn't discuss extending the asset purchase program at the latest meeting.

DoubleLine's Jeffrey Gundlach added to last week’s interest-rate angst, stating after Thursday’s close that it's time to get defensive in bonds. The bond fund manager argued that a shift in longer-term inflation risk will likely drive future monetary policy. He was quoted as saying that “this is a big, big moment,” sharing his belief that interest rates have bottomed. As many consider Gundlach to be the new “bond king” – the smartest bond guy in the room – the market reacted negatively over his publicly-stated position (see Briefing.com’s September 9, 2016 Stock Market Update).

Adding fuel to the fire, Boston Fed President (and FOMC voter) Eric Rosengren struck a hawkish note on Friday morning, stating that there is a reasonable case for continuing a gradual path towards interest rate normalization. Furthermore, Fed Governor Daniel Tarullo said that he wouldn't foreclose the possibility of a rate hike this year. This collective set of controversial comments – along with the 15th anniversary of 9/11 – set off a wave of selling that accelerated right into the closing bell, with losses across the board. (Source: Morningstar.com, September 9, 2016, “Moving the Market”).

The PHLX Semiconductor Index finished well behind the benchmark, retracing its August gain. The index rallied 4.5% in August, but has declined 4.1% thus far in September.

The commodity-sensitive energy space finished in the red as crude oil declined to $45.88 per barrel. The energy component came under pressure as market participants dialed back the potential impact of the weekly inventory report from the Department of Energy, citing temporary supply interruptions from Hurricane Hermes in the Gulf of Mexico.

The economically-sensitive financial sector finished ahead of the broader market, benefiting from rising rate-hike expectations and steepening in the yield curve. According to the CME Group’s September 9th publication: Countdown to the FOMC, Friday’s Fed funds futures market reflects the odds of a rate hike at the September meeting increasing to 24% from 18% in the prior session, while the implied probability of a December hike climbed to 58.4% from 54.2%.

Treasuries ended sharply lower with the long end of the curve demonstrating relative weakness. The yield on the 10-year note rose seven basis points (to 1.67%) while the yield on the 2-year note ticked higher by one basis point (to 0.78%). Trading volume was above the recent average as more than one billion shares changed hands on NYSE. These early September declines have notably clipped some year-to-date returns:

Year-to-Date Performance of Major Stock Indexes Table

Adding more uneasiness to Mr. Gundlach's thesis, headlines crossed the tape indicating that North Korea had conducted its fifth and largest nuclear test on Friday. That development was met with condemnation from North Korea's neighbors, but surprisingly global bonds did not benefit from a risk-off bid. Instead, selling in the Japanese, Italian, and German 10-year notes drove their respective yields higher.

Our “Flip Flop Fed” Triggers a “Sell First” (Think Later) Reaction

I’m not sure what Mr. Rosengren is looking at to generate his line of thinking, but it’s not coming from the economic statistics. Recent Fed chatter seems like a script out of The Twilight Zone with hawkish rhetoric flying in the face of the latest run of weak economic data. Rogengren’s rhetoric expressed late last week came after the ISM Manufacturing Index for August came in at 49.4 (which signals contraction) and the ISM Services Index fell sharply to its lowest reading since February of 2010. These reports follow a soft set of employment data and a relatively dovish speech by Janet Yellen in Jackson Hole August 26th.

Regardless of the cause, Friday’s tale of the tape on the S&P 500 reflected the biggest single-day loss since July, while emerging-market assets and global equities fell the most since Britain voted to secede from the European Union on June 23rd. The yield on the 10-year Treasury note jumped to the highest since June and the greenback almost erased its weekly slide after Rosengren warned that waiting too long to raise rates could “overheat” the economy. Overheat? See what I mean about Twilight Zone overtones?

Try to find some “heat” in the following charts! First, second-quarter GDP was revised down to 1.1% from 1.2% by the Bureau of Economic Analysis, putting today’s economy well below its historic norm.

Real Quarterly Gross Domestic Product Compounded Annual Rate of Change Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Consumer spending has grown, but not by much. Government spending, which drives road construction and other infrastructure funding, has fallen sharply in the current expansion, and residential investment has swung wildly. Here is a survey of the erratic behavior of four major U.S. GDP components:

United States Gross Domestic Product Select Components Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Saying the economy is reaching full employment when the U-6 rate is at 9.7% and the Labor Participation Rate is at a historical low of 62.8% is more than just a stretch. In my view, such talk lacks credibility.

So what we really have here is dissension within the ranks of the Fed. The Fed’s dual mandate (of full employment and 2.0% inflation) isn’t being adhered to by some admittedly hawkish Fed members.

Hourly Earnings Compared to Inflation Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

From what we see from the Fed’s muted second-quarter Beige Book, there is a shortage of high-skilled workers (i.e. – IT techs, engineers, or commercial construction workers), while at the same time we can’t begin to absorb the millions of lesser-skilled folks who are out of work. A good portion of them have all but given up looking for a job. The latest Beige Book survey clearly showed that most regions in the U.S. saw lack of business investment – a key driver of economic growth and hiring at all levels.

Here’s a look at how the current recovery compares to previous economic recoveries since 1960:

Business Investment in Structures, Equipment, and Intellectual Property Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This week’s statistics on retail sales, industrial production, and the Consumer Price Index (CPI) will provide further insight as to whether the knee-jerk market rout last Friday is a one-off event or whether investors have to endure more volatility ahead. With an FOMC meeting on September 21st and an OPEC meeting on September 26th, an elevated state of caution has suddenly gripped investor sentiment.

The positive takeaway from this past week of heightened levels of volatility is that the market is finally providing a buying opportunity for those who have been sitting on the sidelines looking for dividend stocks with excellent fundamentals at great entry points.

Growth Mail:

*All content in "Growth Mail" is the opinion of Navellier & Associates and Gary Alexander*

September Continues to Haunt Wall Street

by Gary Alexander

It’s that time of year again.  Summer is winding down.  The kids are going back to school.  The NFL season began Sunday and the baseball pennant race is heating up.  The leaves will be falling soon.

My old dog “Toolie” used to bark at phantom sounds outside, like falling leaves.  Market analysts are also barking at phantom threats.  Specifically, the talking heads on CNBC were barking all day Friday about a Fed rate increase.  I believe these fears are misguided, at best.  Any quick look at the last few rate-increase cycles shows that the market is either neutral or rising during past interest rate increases.  The last such cycle occurred from 2004 to 2006, when the Fed raised rates in 17 consecutive quarter-point steps from 1.0% to 5.25%, but the S&P doubled from March 2003 to October 2007, including an 11% rise during the two-year rate-rising cycle.  To imagine that a 0.25% rate increase can kill this market is historically unjustified.

Crashes create scars.  In the 120 years since the Dow industrial index was created in 1896, September has delivered an average decline of 1.1% vs. an average gain of 0.8% in the 11 other months.  October is famous for its exceptional crashes in years like 1929, 1987, or 2008, but September is consistently bearish:

Dow Jones Industrial Average Monthly Percent Change Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Some Septembers rise unexpectedly.  In September 1939, the Dow industrials rose a near-euphoric 14.6% in the first half of the month, right after Hitler invaded Poland on September 1st, launching World War II.

Stocks may (or may not) fall again this September, but history shows that stocks tend to recover from negative surprises.  For instance, here are the most memorable “Black Swan” events of the last 75 years:

1941: After a surprise attack on Pearl Harbor, the initial market reaction was surprisingly mild.  After the Sunday morning attack of December 7, 1941, the Dow declined less than 3% on Monday, December 8th (falling from Dow 115 to 112), but then the market stayed remarkably level over the next two months, dipping briefly below 100 in April, then resuming its inexorable rise during the rest of World War II.

1962: In the week of October 22-26, 1962, the Cuban Missile Crisis brought the world to the brink of Armageddon; but the stock market stayed surprisingly calm, falling less than 1% for the week, then rising strongly (+3.5%) in the two days after the threat faded.  The much bigger collapse in 1962 came in the previous spring, when the Dow fell 28% after President Kennedy waged a war of words with U.S. Steel.

1963: The market closed soon after John F. Kennedy was assassinated on Friday, November 22.  The market was also closed for his funeral the next Monday.  On Tuesday, November 26, 1963, the Dow gained 32 points (+4.5%).  Then came Thanksgiving Day, after which the market rose further on Friday, gaining an impressive 5.5% in the week after the shooting of a popular President.  The Dow continued to rise in December (+1.75%), closing 1963 up 17%.  Double-digit gains continued for the next two years, as the economic benefits of the Kennedy-Johnson tax cuts in 1963-64 overrode the tragic events in Dallas.

1968 brought two more tragic assassinations on April 4th (Martin Luther King, Jr.) and June 6th (Robert F. Kennedy).  King was shot on a Thursday evening, spawning riots in dozens of cities.  The Dow fell less than 1% the next day.  The Dow rose 2.15% on the following Monday and 4.6% for the week after King’s death.  After RFK’s death, the market fell just 1%, but then erased that loss in the next few trading days.

1986: On January 28th, the explosion of the space-shuttle Challenger on a sunny Tuesday morning had no impact on Wall Street.  The market gained 1.2% that day, and kept rising the next day, week, and month.

2001: The attack on America on September 11th was targeted at our financial heart, so the market fell sharply when it re-opened the following week, but it’s important to remember that America was also recovering from a recession and bear market when that attack happened.  Still, the market reached its September 10th levels within two months, on November 9, 2001, and kept rising into the spring of 2002.

Dow Jones Industrial Average During September 11, 2016 Shaded Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

These historic examples tell us that the stock market will probably leave you plenty of room to make an orderly exit during the worst of times, but the greater investment risk in such traumatic times would be to sell stocks in a panic, followed by a failure to re-enter the market in time.  America finds strength in adversity.  If you assume the worst and sell all stocks after a crisis, you could miss the quick recovery.

Turning to recent history – the last five years – the market also shrugged off its most publicized threats.

Remember Brexit, Grexit, Sequestration, and the Financial Cliff?

We’re coming up to the three-month anniversary of Britain’s surprise vote to opt out of the European Union (“Brexit”).  The S&P 500 declined for two days, but then it recovered to set several new all-time highs over the summer months.  Those who favored staying in the EU, including former Prime Minister David Cameron, implied that a Brexit vote would lead to an end of their national health system, a banking collapse, a deep recession, and a possible trade war, creating the seeds of a tragic World War III in the future.

While those terrible events may still occur someday, there are still Bluebirds over the White Cliffs of Dover, Nightingales in Berkeley Square and Shakespeare plays, BBC Promenade concerts, or popular musicals entertaining a not-quite-starving British population in this summer of their alleged discontent.

Forgive my purple prose, but the doom-and-gloom crowd aren’t the only purveyors of colorful scenarios when it comes to imagining our economic future.  Fear sells more than hope.  Economics is called the “dismal science” with good reason, but history shows that huge challenges tend to unite us.  We are an adaptable species that usually finds a way to prosper no matter what roadblocks our politicians create.

Prosperity is growing and poverty is shrinking around the world, but there will always be tragic cases of inequality to tear at our heartstrings.  We rubber-neck at the car wreck at the side of the road, but ignore the long-term trend toward far fewer deaths per 100 million miles driven.  We bemoan terrorist events, as we should, but we fail to see the progress from global bloodbaths of the past, such as World Wars I & II.

Two weeks ago (August 29th), in “When Economic Doomsayers Stumble,” the Wall Street Journal’s Josh Zumbrun surveyed the market action after Brexit and two other similar scare-stories since 2013:

When the Sky Did Not Fall Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Before these events, I cautioned our readers not to be overly concerned with the market outcome of a potential Greek exit (Grexit), or the coming U.S. budget cuts, or Brexit.  I was outnumbered by economists who tended to grab the headlines with far more dismal things to say.  At the time of sequestration and “the financial cliff,” for instance, I quoted economists who predicted an immediate recession and long lines at airports due to budget cuts.  (P.S. Real U.S. GDP grew 2.4% in both 2014 and 2015.)

There was a Greek crisis nearly every year from 2010 to 2015.  In the most recent rerun, Zumbrun said, “Warnings abounded in 2015 that if Greece rejected an international bailout, it could spark a sovereign default or a banking crisis or Greece being cast off the euro.”  The outcome: “Its banking system has been battered and drained of deposits, but hasn’t collapsed. It remains in the euro.”  Greek 10-year bond yields spiked up to 18% on July 5, 2015, but they have since fallen consistently down to the 8% level.  Likewise, the British stock index, the FTSE 100, fell June 24 but recovered to near-record levels of 6940 in August.

Why do we focus on the negative?  Zumbrun quoted Philip Tetlock, an expert in political forecasting at the University of Pennsylvania, who said, “Forecasters often feel incentivized to pump up the probability of worst-case scenarios,” inflating the probability of disasters.  Tetlock said a dire forecast that comes true is “something they can boast about” while their mistakes “will be something most people forget.”

Global Mail:

*All content in "Global Mail" is the opinion of Navellier & Associates and Ivan Martchev*

The “Short of the Century” Has Even Longer to Work Out

by Ivan Martchev

While I would be surprised if the Federal Reserve raised its short-term interest rate target this close to the U.S. Presidential elections, stranger things have happened. Even without a rate increase, the dynamic by which Fed officials ratchet up rate hike signals and cause a sell-off in bonds and stocks has struck again.

Recognizing the Fed’s unelected powers, one has to admit that the Fed does not have to hike the fed funds rate in order to tighten financial conditions. There are numerous other mechanisms having to do with repo activity and commercial banks, or they can just keep talking about rate hikes, as they’ve done lately.

When we had the sharp sell-off in stocks and junk bonds in January of 2016, driven by the threat of more Fed rate hikes and a sharp sell-off in the Chinese stock market, Morgan Stanley economists estimated that the sell-off in stocks, bonds, and commodities had done the work of four Fed rate hikes (see Bloomberg, January 22, 2016, “Market Volatility Did the Work of Four Fed Rate Hikes: Morgan Stanley”). If we see a September sell-off in stocks, bonds, and commodities as large as what we saw in January, the Fed would not have to actually do any rate hikes. The financial markets would have “hiked” for them.

One big difference compared to the sell-off in January is that this sell-off started in the government bond markets. Treasuries (U.S. “govvies”), bunds (Germany), and JGBs (Japan) all sold off to the point that the negative rates on 10-year government bonds in Germany and Japan are about to become positive, with 10-year bunds closing last week with a yield of 0.011% and 10-year JGBs closing at -0.015%.

Ten Year Treasury Note - Monthly OHLC Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

While the sell-off in Treasuries is still tiny and can barely be noticed on a longer-term chart (above), it is all over the news channels that bonds are “crashing.” They may crash someday, but this is far from being a crash, yet, if we want to be realistic. We made an all-time low in 10-year Treasury yields at 1.31% in July and we closed last week at 1.67%. I would be surprised if we make it too far above 2%, if that, on this move. Treasury yields are mired in a downtrend that began in the early 1980s when Fed Chairman Paul Volcker broke the back of inflation. We probably still have not hit the lowest level we’ll eventually reach, given the deflationary backdrop globally. My working thesis at the moment is that the 10-year Treasury will decline to 1% or lower in due course, when this deflationary trend plays its full course.

During these serial panic attacks in both stocks and bonds, there have been a number of bond gurus who have tried to call a bottom in interest rates, some of them serially. This happened in April 2015 when the German 10-year bund reached five basis points (0.05%). Former bond king, Bill Gross, formerly of PIMCO, and the current bond king, Jeffrey Gundlach, presently of DoubleLine Capital, tried to call a bottom in German interest rates. They referred to the German bund market as the “short of the century.” (see Barrons.com, May 2, 2015, “German Bunds: The Short of the Century”).

Ten Year German Government Bond Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Since I am well aware of the deflationary dynamics playing themselves out in the global economy at present, I had very serious suspicions back then (April of 2015) that the bund market was the short of the century. On May 4, 2015, I penned a piece here titled, “The Short of the Century May Last a Little Longer.” I penned another one, (“The “Short of the Century” May Last Quite a Bit Longer”) on February 2, 2016. Now I am penning this column with a slightly different title as #3 in the series.

Japanese Ten Year Government Bond Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As to that other “short of the century” (the JGB market), we’re still waiting for that to work out after the late and legendary Barton Biggs singled out the Japanese Government Bonds for a short investment opportunity in Morgan Stanley's Investment Perspectives in 2003! I have no doubt that someday the Japanese bond market may provide absolute return to investors with a great shorting opportunity, but if it has not done so in the last 13 years, it most likely will not be “the short of the century.”

When it comes to serial bottom callers in interest rates, even though they may be highly successful money managers, I have to say we are starting to come awfully close to the broken clock analogy. A broken clock, they say, is right twice a day. If one keeps calling a bottom in U.S. Treasury yields, that bottom may finally come, but that would definitely not serve as a vindication of the serial bottom caller.

The China Factor in U.S. Interest Rates

I think we will get a bottom in U.S. Treasury yields after the coming Chinese recession and devaluation, which are highly correlated and only a matter of time, in my view. A sharp Chinese devaluation is highly deflationary from a global perspective and should push U.S. interest rates to fresh all-time lows.

Chinese Yuan Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

To be fair to Chinese authorities, they have been devaluing the yuan in slow motion (see chart above), but this is nothing like the overnight devaluation they delivered in 1994 to the tune of 34% (see chart below).

China Foreign Exchange Reserves Versus Yuan Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I think a more dramatic Chinese devaluation may be necessary as the present slow-motion train wreck in the Chinese economy gathers speed. China is experiencing the effects of a credit bubble. When China's GDP grew 10-fold from $1.089 trillion at the turn of the century to $10.866 trillion at the end of 2015, China’s total debt-to-GDP ratio grew from about 100% to about 400%, if one counts shadow banking leverage. A four-fold increase in the total leverage ratio means a 40-fold increase in the total amount of credit in the Chinese economy from 2000 to 2015.

This is the very definition of a credit bubble. The Chinese situation is very similar to the U.S. in the 1920s, when a credit bubble led to a period of rapid economic growth known as the Roaring Twenties, followed by the Crash of 1929 and the Great Depression, which was exacerbated by a series of policy errors, like the imposition of trade barriers and the tightening of monetary policy at the wrong time.

That said, I think a Chinese recession is in the cards in the immediate future as I believe the credit bubble in China is deflating. Both 2015 and 2016 have brought bad news in the Chinese economy, even though the deterioration has so far been orderly, save for the crash in the Chinese stock market (for more on this, see my February 3, 2016 Marketwatch article, “Something Broke in China in 2016”).

I think that deterioration in China will accelerate in 2017 as it becomes evident that China’s authorities don’t have a choice, they will have to devalue the yuan. Reserve requirement ratios and interest rate cuts don’t work well if the non-performing loan (NPL) ratio is surging. A yuan devaluation bypasses the financial system and could act as an adrenalin shot into the heart of the Chinese economy.

The resulting global deflationary shock from the coming yuan devaluation should cause a fresh all-time low in U.S. Treasury yields. Until then, buy the dips in the Treasury market no matter how big they are.

Sector Spotlight:

*All content in "Sector Spotlight" is the opinion of Navellier & Associates and Jason Bodner*

We Fear “Perfect Storms” but Ignore Clear Blue Skies

by Jason Bodner

In 1972, Apollo 16 astronaut Ken Mattingly lost his wedding ring on the second day of the mission to the moon. The astronauts proceeded with their mission and spent three days on the moon. On the 9th day, General Charles “Charlie” Moss Duke Jr. went out to check on Mattingly, who was performing a spacewalk. Unbelievably, the wedding ring was floating towards Mattingly and hit the back of his head, bouncing directly back to Duke’s hand – a space miracle rivalling the Lord of the Ring saga:

Magic Moments Image

Sometimes in life, things just have a way of working out. In those magic moments, people usually don’t stop to ask why. It’s unfortunate, but humans typically don’t take time to appreciate or question why things work out well for them. I bet sometimes in your life you have misplaced something precious and when the situation seemed hopeless, somehow it came back into your possession, much like this lucky astronaut’s ring. I also bet that you didn’t stop to analyze and question how you got lucky enough to conclude the situation positively. All too often those types of questions only come about when things are going wrong. Why is this happening to me? Or: How is it that things are working out for everyone else?

Let’s be honest – the market is no different. Look at the latest six-month rally that has taken place since February 11th. Brexit was just a momentary blip. I didn’t hear many conversations beginning: Why are we rallying? Why is the market doing so well? The questions are typically geared towards the negative, like: Why is healthcare down again today? As I’ve been repeating here for months, the market has vaulted to new highs on regained ground from previously beat-up sectors. The likes of Financials and Energy have accounted for much of the market’s strength the past several months. But last Friday saw the first day in two months with a greater than 1% move, according to Bespoke Investment Group. We had been asking When will volatility resume? But now, the question has become: Is this just an excuse to take profits?

Last week, I was discussing the thin volumes of late summer and the potential for outsized moves ahead. Perhaps that makes me a prophet, but others were saying the same thing. The sell-off, while significant, may or may not be the start of a near-term downtrend. Energy prices have generally been under pressure (except for last week). Should this trend continue, it could have a negative impact on the overall market.

Most of the world’s equity markets were down 1% or more on Friday. Call it fear of a rate hike, selling ahead of 9/11, or just the fact that the market needed to retreat, but the market cried ‘uncle’ on Friday.

Weekly, Quarterly, and YTD Winners and Losers

Let’s look into what the S&P sectors did for last week. First off, the new 11th sector, Real Estate, still does not have a corresponding S&P Sector index for us to monitor. In the meantime, it is worth pointing out that the MSCI US REIT Index was down a substantial -3.91% on Friday, according to FactSet:

MSCI US REIT Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Last week was ugly, but not for every sector. Energy finished +0.65% for the week as the only positive performer. Consumer Staples was hardest hit (-3.87%), followed by Materials, Consumer Discretionary, and Industrials; all down more than 3% for the week. The fact that the selling was fairly uniform across the board signals more of a technical event than a specific crack in the market. However, after months of stocks making new highs on gradually decreasing volume, this choppy market could continue a bit.

Standard and Poor's 500 Weekly Sector Indices Changes Table

Three-month performances reflect our old friend Info-Tech reigning as king. I began highlighting this sector months ago. On the other end of the spectrum, Consumers and Utilities have borne the brunt of much of the selling beneath the surface, with Consumer Discretionary the clear loser:

Standard and Poor's 500 Quarterly Sector Indices Changes Table

It’s no secret that the market has been churning all year long. These rotations are clearly visible when we compare the nine-month return table to the three-month return table. The ranks are jostled around and we see Healthcare and Financials as the nine-month losers while Telecom and Utilities were the nine-month winners. Yet for three months Tech and Financials led while Utilities and Discretionary sagged.

Standard and Poor's 500 Nine Month Sector Indices Changes Table

These data tell me that the market, despite a low VIX and the previous smooth rally, is still vulnerable and volatile beneath the surface. I would still like to see Technology continue to lead and Financials to gain strength, despite their currently weak fundamentals. This would be healthy for a bull market.

The bull market we are witnessing is not built on strength, but more on accommodative central bank policy. Strength in the market may continue, as it typically does in election years, but this year’s election leaves a lot to be desired with most Americans questioning the character of the candidates. We could see more volatility as days like Friday are the days High Frequency Traders wait for. Such days can make or break a trader’s year. When volumes dwindle and spreads widen amid downward pressure, this makes the perfect conditions for many HFT firms. They wait for these days and want them to continue.

Naturally, no one knows what tomorrow will bring for the market. Case in point, Friday caught many by surprise. But perhaps it helps to question why things are working well as much as asking why they are not. Passively accepting the good and actively dreading the bad may end in heartburn and heartache.

Being prepared and analytical can help to explain both outcomes, but either way, as Buddha said: “Work out your own salvation. Do not depend on others.”

Buddha Decal Image

A Look Ahead:

*All content in this "A Look Ahead" section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.*

Financials and Energy Are Still the Most Dangerous Sectors

by Louis Navellier

Let’s try to put Friday’s sell-off in perspective.  Rather than look at the overall averages, let’s examine the major market sectors.  I have long said that the most vulnerable sectors are financials and energy, which have been relatively strong over the last few months, but they also have truly horrific fundamentals.  For the financials, the flat yield curve is devastating for major banks, which suffered greatly on Friday due to the news of the big fine that a major U.S. bank had to pay for alleged misdeeds, causing massive layoffs.

As for the energy sector, as I have repeatedly said here, no one knows how low crude oil will go in the upcoming months as seasonal demand slumps.  Last week, crude oil briefly ceased its slippery slope on Thursday after the American Petroleum Institute and the Energy Information Administration (EIA) both reported that crude oil inventories declined by over 12 million barrels in the latest week, due largely to the fact that up to 22% of the crude oil platforms in the Gulf of Mexico were shut down due to Hurricane Hermine.  Due to this slow-moving tropical storm (which eventually became a hurricane), shipping was disrupted and crude oil imports declined by 1.8 million barrels in the latest week.

Despite this temporary inventory disruption, I still expect that crude oil prices will continue to decline steadily, simply because global demand declines substantially after the summer driving season ends.

As a result, financials and energy remain the most vulnerable sectors, in my view.  Nonetheless, all stocks and sectors were hit on Friday, including dividend stocks on fears of higher interest rates, but I want to assure you that good stocks bounce like fresh tennis balls while bad stocks fall like rocks.

What to Expect in Late-September’s “Window Dressing” Season

Even though September is the worst market month historically (over the last 20, 50, and 100 years, according to Bespoke Investment Group), Bespoke adds the good news that the first half of September tends to outpace the second half, and the Septembers of the last 30 years have been net positive in bull markets and in Presidential election years.  In bull markets, the first half of September has averaged 3.2% gains (since 1986) and +0.6% for the full month.  In the seven Presidential election years since 1988, they say, Septembers have been barely positive (+0.04%), including a +1.6% in early September.

As I have said in previous editions of Marketmail, the S&P 500 tends to consolidate in the second half of September as portfolio managers do their quarterly in-house “window dressing,” which means cleaning out losing positions to make their quarter-ending list of holdings look more attractive.  This “flight to quality” tends to help fundamentally stable stocks rise above the pack by quarter’s end.


It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor's holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Growth Investor, Louis Navellier's Breakthrough Stocks, Louis Navellier's Accelerated Profits, and Louis Navellier's Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters' reported performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

Marketmail Archives Trade Summary

It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor's holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Growth Investor, Louis Navellier's Breakthrough Stocks, Louis Navellier's Accelerated Profits, and Louis Navellier's Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters' reported performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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