By Kris Sayce, editor, Casey Daily Dispatch
If you’ve kept up with us this month, you’ll know we’ve followed a theme…
…That September is the worst month for the stock market.
And so far, it has played true to form.
The S&P 500 is down 2.8% for the month.
And the month isn’t over yet.
Could it get worse?
We’ll put our neck on the line here…
Our bet is the worst has passed.
We’ll explain why below…
If this is your first time reading the Dispatch, welcome. If you’ve been here before, welcome back.
At the Dispatch we have two goals:
To introduce you to the most important investing themes of the day, and
To show you how to profit from them.
We do this by showcasing ideas from our in-house investing experts: Dave Forest and Nick Giambruno. And from the founder of our business, Doug Casey.
Today, we’ll update you on this month’s market action so far, and we’ll explain why it’s the perfect time to buy.
These Are Among the Best Months of the Year
As we’ve explained over the past few weeks, historically, September is the worst month of the year for stocks.
It’s no contest.
The reasons for September’s poor performance? We can only guess. But in all honesty, we’re not sure it matters. The data tells us that September is a bad month, so we take notice.
But here’s the thing. The data also tells us that the last three months of the year are great months for the stock market.
According to Moneychimp.com, which analyzes S&P 500 data going back to 1950, the last three months of the year have registered the following average returns:
That compares to the September average of -0.62%.
Oh, and as a bonus, on average, January returns 0.97%.
You see? While the market has appeared to be bad over the past three weeks, the next four months are among the best of any year.
It’s why, despite all the news headlines… and the big market swings… we’ve told you to stick with stocks. We’ve even suggested you strategically buy stocks or add to your positions.
We’ve said that because while investors can panic when the headlines look bad, most often it isn’t that bad. Besides, right now (and for the past 13 years), there’s another factor that’s helping support stocks…
The Federal Reserve.
The Fed Boosts Stocks Again
Our view on the Fed is that while it wants asset prices to go up and stay up, it doesn’t want them going up in a straight line.
The Fed is happy to see stocks rise… take a break… fall a bit… and then resume their upward climb… before taking another break.
And so on.
It’s all part of the manipulation (which includes making you think it’s not manipulating the market!) The following report from Yahoo Finance shows that:
The famed ‘Fed put’ is alive and well.
The Federal Reserve isn’t entirely asleep at the switch on soaring prices, and doesn’t appear to be committing a policy error – at least not yet.
Those were the main takeaways from Wall Street’s reaction to the Fed’s policy decision, which sent a market addled by Evergrande on a tear. As expected, Fed Chairman Jerome Powell hinted that the long-awaited, gradual pullback in the pace of its stimulative bond-buying was nigh.
Investors rejoiced, mollified by the Fed’s reassurance that it would not suddenly snatch away the punch bowl that’s helped keep benchmarks perched near record highs in the face of COVID-19. Thus, did the vaunted “Fed Put” remain intact, with asset prices jumping in appreciation.
Remember, we’re not saying we agree with what the Fed does (we don’t). Like most of Wall Street, we know the Fed’s gameplan. It’s to manipulate asset prices higher. It does that by keeping interest rates low and encouraging inflation.
But knowing what the Fed is doing is one thing… knowing how to take advantage of it is another…
How to Play the Year-End Rally
The big mistake here is to look for stocks that are trading at 52-week lows… or even stocks that are lower in September than they were in July or August.
That’s not the deal.
This isn’t about buying beaten-down stocks. It’s not about value investing, or “turn-around” plays. This is about taking advantage of a market timing event.
By that, we mean we know the market behaves this way in September (the data covering 72 years tells us so), so we try to use that for our advantage.
A good example is one of Dave Forest’s gold plays. We can’t reveal the name of the stock because it’s still an open position in his premium Strategic Trader service.
The stock price is up 30% in the past six months. But in September, like many stocks, it pulled back from a recent high. Now, it’s on the way back up again.
Would buying it today mean buying at the low? No. But as you can see from the chart, it’s starting to move higher. It has had its ups and downs in September. But this is the kind of stock that Dave likes.
What’s more, as Dave told us on a phone call recently… thanks to the relatively high gold price, gold stocks are generating a lot of cash. This has resulted in increased dividend payouts.
In fact, the stock we’ve just referred to here is due to go ex-dividend in the next few days. That means anyone who buys the stock up to the day before the ex-dividend date will qualify for that dividend.
And at a dividend yield of 1.8%, that’s more than you’ll get from the S&P 500. With interest rates staying low… and inflation continuing to run high… that can only mean good news for gold and gold stocks over the long run.
You can find more details on how to access Dave’s favorite gold play here, and how to play this asset class using another of Dave’s favorite investing ideas – warrants – a subject we’ve covered at length previously.
Alternatively, if you prefer something with lower risk (which potentially means lower returns), you could check out the VanEck Vectors Gold Miners ETF (GDX). Unlike Dave’s favorite gold play, the ETF is down 2% for the year. It also pays a dividend, at a yield of 0.56%.
ETFs can be a good way to play a particular sector, although we always prefer investing directly in individual stocks. Either way, Dave likes gold right here, and based on how history tells us the market will perform through January next year, now is the perfect time to buy.
Editor, Casey Daily Dispatch
P.S. On the subject of gold, we asked colleague Imre Gams to give us an update on the gold price from a technical analysis perspective. You can see that below…
Welcome to Casey Daily Dispatch’s Chart Watch. We’ll look at the best technical opportunities in the market. You’ll see that chart analysis is a very powerful edge that every investor should have in their toolbox.
Our mission is to simplify price charts. We remove all the clutter and the noise, leaving you with a crystal-clear view of the markets.
Here’s Where Gold Goes Next
By Imre Gams, technical analyst, Casey Research
Gold is a market that has driven traders absolutely insane over the last several weeks.
And for good reason.
As I write this issue of Chart Watch, gold is currently trading at $1,775 per troy ounce… which happens to be where gold was priced all the way back in April.
That means over the course of five months, the price of gold has basically gone nowhere at all.
But that would only be telling half the story.
And that’s because where gold is trading right now is just as important as how it got there.
Many traders would think that because a market hasn’t had much of a net change in price, it is a rangebound market going sideways.
Sometimes this is the case.
Sometimes, however, you’re dealing with a trending market that has simply taken a breather.
This is important, because the strategies used to trade a sideways market versus a trending one are completely different.
Therefore, it’s crucial to really understand the nature of the market you’re thinking of trading in.
In my opinion, the best way of accomplishing this is by examining the price chart.
So let’s look at my analysis of gold on the chart below.
There are three key features to this price chart:
The strong move off the March 2021 lows, which ultimately peaked at $1,910 around June 2021.
The inverse head and shoulders pattern with the two shoulders and the head labelled.
The three key levels which can be used as upside targets.
I believe the strong move from those March 2021 lows was the first wave of a new bullish trend.
Markets rarely move very far in a straight line in either direction. Far more common is a series of price peaks and valleys that together move either higher or lower.
For example, just look at the decline in gold from the August 2020 peak of $2,069. Notice how prices would sell off for a few days and then bounce… then they would sell off again, before bouncing once more.
Eventually, however, gold managed to work its way down to $1,678, resulting in an 18.9% correction.
If I’m right… and the first wave of the next bullish trend in gold has been established, then the decline from the $1,910 peak should ultimately prove corrective.
This means that the March 2021 low of $1,678 must remain intact.
But we need to see confirming price action.
This brings us to the inverse head and shoulders pattern on the price chart.
The last head and shoulders pattern we looked at was in Freeport-McMoRan. You can check out the details of this important chart pattern here.
The inverse pattern that is taking shape in gold works the exact same way. The pattern can be considered complete if prices breach the neckline.
That would be the trigger I’m looking for to confirm that gold is headed higher.
And that is where the key levels come in. You can look to use these key levels as upside targets.
If the neckline never breaks, then it’s no big deal. We will simply wait for another high-probability opportunity to take shape.
I’ll keep a very close eye on gold. If the neckline breaks, I’ll be sure to update you in another issue of Chart Watch.
Until next time,
Technical Analyst, Casey Research