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Charting the Course: Buying Opportunity or More Pain Ahead?

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Stocks have begun the final trading week of September, and it’s been a month to forget for the major U.S. indexes. Before the open on Monday morning, the Nasdaq Composite shed nearly 6% of its value through the month thus far, the S&P 500 lost more than 4%, while the Dow is down just over 2%. The declines came after all three indices were lower in August as well.

The recent volatility wasn’t entirely unexpected, as the August-September timeframe is the weakest two-month stretch of the year from a historical perspective. Selling pressure tends to pick up in September, which is the worst month of the year dating back to 1950 with a -0.7% average return. This time has played out similarly, but there’s still a chance for the bulls to pare those losses before month-end.

Technical Damage Beginning to Mount

The S&P 500 has broken down below both its 50-day moving average (blue line) and the August low. Potential areas of support include the high from last August (around 4,300) and the 4,200-breakout level, which happens to coincide with the index’s 200-day moving average (red line).

Image Source: StockCharts

Market breadth has also deteriorated in conjunction with this recent pullback. As of September 22nd, only about 44% of S&P 500 stocks were trading above their respective 200-day moving averages, which is down from 76% in late July. We’ve also seen swift sector rotation throughout this downward move, with energy being the top-performing sector over the last 1-month and 3-month periods.

Inflation’s cooling trend is being challenged as rising energy prices have been a drag on consumers. Numerous concerns remain in the current investment landscape, including geopolitical issues and rising treasury yields. The latter has served as a major headwind for stocks over the past several months.

Still, the S&P 500 remains above an upward-sloping 200-day moving average, and while some minor damage to the chart has occurred, the uptrend off the bear market lows from last year remains intact for the time being.

Buying Opportunity Aligning with Yom Kippur?

Even though we are in the midst of a weak seasonal period, we need to keep the broader picture top of mind. The weight of the evidence that we have in hand at this point suggests a high probability that a new bull market is underway. This gives rise to the idea that this recent weakness in the market will be a ‘buyable’ pullback.

The old saying of “Sell Rosh Hashanah, Buy Yom Kippur” appears to be aligning quite well with the overall weak September seasonality. The idea behind it is that market participants sell heading into Rosh Hashanah to rid themselves of financial commitments, and then return to the market after Yom Kippur (known as the Day of Atonement).

Let’s also keep in mind that the historical statistics are on the side of the bulls. Even though August and September have been rough, markets may have simply been due for a breather after a phenomenal first 7 months of the year. In fact, the last three times the S&P 500 was down at least 1% in both August and September, October returned 8% in 2022, 8.3% in 2015, and 10.8% in 2011. And the index has been higher 9 out of the past 10 times given those conditions.

The fourth quarter of pre-election years is also notoriously strong and has been higher more than 70% of the time dating back to 1950. And when August and September have been lower, Q4 has been higher 9 out of 9 times since 1981, with an average return of 9.1%. It’s a reminder that strong gains can follow weak periods, assuming we have the patience to participate and the data continues to improve.

Stocks to Watch

For long positions, we want to target stocks that have held up well through the volatility as they will likely be the ones to lead once the market regains its footing. Akamai Technologies (AKAM - Free Report) has broken out to new 52-week highs in September as the general market has made a series of lower lows. A global provider of content delivery network and cloud infrastructure services, Akamai Technologies has exceeded the earnings mark in each of the past four quarters.

Currently a Zacks Rank #3 (Hold), the company boasts a trailing four-quarter average earnings surprise of 5.51%. AKAM shares have surged more than 20% in the past three months alone.

Zacks Investment Research
Image Source: Zacks Investment Research

For the current quarter, analysts have revised earnings estimates upward by 7.09% in the past 60 days. The Q3 Zacks Consensus Estimate now stands at $1.51/share, reflecting potential growth of 19.8% relative to the same quarter in the prior year.

Zacks Investment Research
Image Source: Zacks Investment Research

On the other hand, in the event that the recent selling pressure persists and oil prices continue to climb, energy stocks should continue to do well. Baker Hughes (BKR - Free Report) , a Zacks Rank #2 (Buy), broke out of a multi-month base in July and has been hitting a series of 52-week highs. Baker Hughes has surpassed earnings estimates in three of the last four quarters, with an average earnings beat of 6.56%. BKR shares have risen more than 58% in the past year.

Zacks Investment Research
Image Source: Zacks Investment Research

Final Thoughts

Pullbacks and corrections in any form or fashion are never easy to deal with, but having a plan in place helps us maintain a steady hand during volatile times. While weak seasonality came to fruition in August and September, historical statistics point to a high probability that this recent pullback will be a buying opportunity.

Tech stocks like AKAM should do well if that is the case, while energy stocks such as BKR will likely continue to lead if the volatility persists. Make sure you’re taking advantage of all that Zacks has to offer as we approach the fourth quarter.

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