A September To Remember
U.S. stocks remain under pressure, with Syria and interest-rate worries weighing on sentiment. While near-term trading could be choppy, we are maintaining a mostly invested posture. The primary trend remains in the bullish camp under the Dow Theory, and we are still finding high-quality stocks at reasonable valuations.
Grounds for concern
September, the U.S. stock market's worst month historically, poses some highly visible risks this year. By the end of the month, investors should have at least partial answers to some questions of central importance:
• If the U.S. strikes Syria because of its use of chemical weapons, will it ignite a powder keg in the Middle East? Will oil prices surge on supply concerns or pull back as worst-case scenarios are avoided?
• Is the U.S. Federal Reserve really prepared to begin tapering its easy-money policies, reducing its $85 billion in monthly bond purchases? After the Fed's next meeting concludes Sept. 18, it is expected to announce a cutback in its bond-buying program.
• Is the global economy really on the mend? Or will uncertainties related to Syria, rising bond yields, and emerging-market currency volatility halt recent signs of progress, including much-improved manufacturing data in both Europe and Asia?
That is a lot of questions for one month to settle, and nothing the Fed says or does will eliminate concerns regarding the impact of rising bond yields. But recent reports suggest U.S. and overseas manufacturing are rebounding, and U.S. employment and consumer confidence are holding up fairly well, so stocks could enjoy a relief rally if we get through September without any major disappointments.
Encouragingly, investors appear to be bracing for a letdown, with sentiment surveys and mutual-fund outflows suggesting many are well aware of September's poor historical record. In fact, for the first time since November, bullish newsletters are now outnumbered by those expecting a correction, according to Investors Intelligence. The percentage of outright bears is at an eight-month high.
Subscribers should watch the averages, paying close attention to their reaction to news. A rally that lifts the Industrials above 15,658.36 and the Transports above 6,670.06 would reconfirm the bullish primary trend, while a failed rally attempt at those all-time highs would set the stage for a bear-market signal.
For now, our buy lists have 94% to 98% in stocks. Especially attractive picks include Quadrix standouts Capital One Financial ($64; COF), Kroger ($37; KR), and Lear ($69; LEA).