Just as I predicted, August was a bumpy, unpredictable ride.
The S&P 500 closed the month down 1.8%. All the other major indexes ended the month in the red, too.
The markets jittered on major geopolitical events: a potential no-deal Brexit… the Hong Kong protests… Argentina’s stock market crash… and escalating U.S.-China trade war tensions.
Even Mother Nature got in the act. Hurricane Dorian tore through the Bahamas and threatened the U.S. Atlantic Seaboard. (The Category 5 storm’s eye came dangerously close to my home in Palm Beach County, Florida—within 50 miles.)
We’ve bid farewell to this volatile August. But what’s in store for September?
Well, after doing a deep-dive, I’m sharing what the data is showing today—and more importantly, what it means for your portfolio…
The Good and the Bad
Selling finally slowed heading into the Labor Day holiday weekend. Now, the good news is, the market rallied a bit.
But the bad news is, this rally came off low volume. So this bounce could be a false sign. And I believe we’ll experience more discomfort this month.
Regular readers know I’ve created a proprietary system that scans nearly 5,500 stocks every day to look for the best ones that the smart money is piling into. It also looks at the ratio of buying to selling in the market.
When the ratio is above 80%, the market is overbought—and likely gearing up for a pullback. And when it’s under 25%, the market’s oversold, signaling a potential rally ahead.
Right now, the ratio is below 45%, which is a sign of caution…
This dip below the 45% level usually means selling is near an end. But volatility may continue, and it could drop the ratio into oversold territory (the green area on the chart).
Yet this isn’t something to worry about. When the ratio has dropped into oversold territory in the past, a rally has followed (see the red lines above).
So although we might feel a bit more pain ahead, the market will rebound…
Look at the Big Picture
Look, the data is indisputable: Over the last century, the market has continued to climb higher…
Of course, there’ll be bumps along the way. We saw them in August—and expect to see them in September, too. The market doesn’t go up in a straight line.
But in the long term, the current bout of selling is just a blip on the radar. The market will trudge ahead again. As I’ve said before, U.S. markets are an oasis in a sea of uncertainty, and they’ll continue to attract capital.
With all the geopolitical turmoil, investors will have no choice but to put their money in quality U.S. stocks. Plus, U.S. equities continue to look more attractive than other securities, including “safe-haven” bonds.
For instance, the S&P 500’s dividend yield is right around 1.92%, while the benchmark 10-year Treasury’s yield is 1.47%. But each is taxed differently.
Dividends are taxed at 23.8% (the maximum long-term capital gains rate). And bond income is taxed at the 40.8% maximum federal rate for ordinary income. So your after-tax return on stocks is about 67% more than on bonds.
So don’t worry. We’ll see investors flock back into U.S. markets soon. In the meantime, we need to prepare for continued short-term selling…
Get your dry powder ready. We’ll be looking for the best companies the big money is showing interest in.
We’ll pounce when these names go on sale. And buying quality stocks at a discount and holding them for the long term is the best way to make money in the markets.
Just remember: patience and process.
Editor, Palm Beach Trader
P.S. Years ago, my former firm helped create the fastest high-speed trading system in Wall Street history…
So I knew what to look for when creating my own proprietary system. It allows me to identify the fastest-growing stocks on the market up to 30 days before they start to soar.
In fact, it’s found the current winners in my Palm Beach Trader portfolio—like The Trade Desk and Paycom Software—with triple-digit gains in under nine months.