A Cautionary Note on These Two Stock-market Sectors

September, often referred to as "Septembear" due to its reputation for poor stock market performance, has defied expectations this year. Investors who trimmed their portfolios in anticipation of a weak month may find themselves regretting that decision. With just two trading days left, the S&P 500 has hit a new record high — its 42nd of the year — and is up 1.7% so far in September.

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Jeffrey Rubin, president and research director at Birinyi Associates, dismisses the significance of such seasonal trends. Rubin, who took over the firm after the passing of the legendary Laszlo Birinyi, emphasizes that he doesn’t incorporate seasonality into his investment strategy. In a recent note, Rubin explained, “People often ask us why we do not incorporate seasonalities into our investing process…Seasonalities might be interesting and are good for a sound bite or two, but too often and most importantly, they are not profitable.”

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Though Rubin is skeptical of seasonal patterns, he is more open to technical analysis and has concerns about certain sectors of the market. One area he’s watching closely is the technology sector, particularly as tracked by the Invesco QQQ Trust Series I ETF (QQQ) and the Technology Select Sector SPDR ETF (XLK). While Rubin hasn’t turned bearish on tech, his neutral rating reflects the fact that both the QQQ and XLK have been trading within a wide range since early June. He advises investors to be cautious, suggesting they should buy when these indices are at the lower end of their ranges, rather than at the top, and avoid assuming they will break out higher.

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Rubin notes that the trading ranges for the XLK and QQQ are between $203 and $233, and $443 and $496, respectively. He suggests that investors should take "smaller bites and shorter time frames" when trading in these ETFs until there is a clear breakout from the current range-bound movement.

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Another sector that has raised concerns for Rubin is energy, specifically the S&P 500 energy sector as tracked by the Energy Select Sector SPDR ETF (XLE). Rubin believes this sector is in a downtrend and is therefore avoiding most energy-related companies, except for a few that show promise. Of the 22 members in the sector, Rubin mentions that very few qualify as buys, with the exception of some pipeline companies. He does, however, suggest that occasional trades in the sector might be appropriate, particularly trimming long positions during any rallies.

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Rubin points out that energy prices, particularly oil, are down significantly. Oil prices are 26% lower than they were at this time last year, and without a major geopolitical crisis, such as one in the Middle East, Rubin doesn’t expect oil prices to return to their 2023 highs. Consequently, he believes there is limited upside in the energy sector.

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The energy companies that Rubin sees as being in an uptrend include Williams, ONEOKE, Targa Resources, and Kinder Morgan. Meanwhile, Exxon Mobil, EOG Resources, Baker Hughes, and Marathon Oil are viewed as being in a neutral trend. Rubin notes that companies such as Chevron, ConocoPhillips, Marathon Petroleum, and Phillips 66 are in a downtrend, along with several others like Valero Energy, Hess, Occidental, and Halliburton.

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As for the broader market, U.S. stock indices, including the S&P 500, Dow Jones Industrial Average (DJIA), and Nasdaq Composite, opened higher on Friday as Treasury yields dipped. This was in response to benign inflation data from the core personal consumption expenditure (PCE) price index, which rose 2.7% year-over-year through August, in line with expectations. The month-over-month core PCE figure climbed just 0.1%, below the 0.2% forecast. This soft inflation reading has temporarily eased fears of further aggressive rate hikes from the Federal Reserve.

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On the currency front, the U.S. dollar index dropped slightly, while the Japanese yen strengthened sharply. This led to a decline in Nikkei 225 futures after Japan’s ruling party elected former defense minister Shigeru Ishiba as its new leader, a move that rattled markets due to his perceived support for higher interest rates.

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In corporate news, Bristol Myers Squibb saw its shares rise by 3% after the U.S. Food and Drug Administration approved a new drug for treating schizophrenia. Meanwhile, Tesla, Nvidia, and Alibaba were among the most active stocks in premarket trading. Other notable movers included NIO, which saw a surge of 12.92%, and Trump Media & Technology, which gained 7.47%.

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Retail investors, who were active buyers during the market's summer dip, have largely refrained from aggressively chasing stocks higher in September. Vanda Research noted that retail flows into capital markets remain robust, currently averaging $1.12 billion per day over the past three years. However, the next set of challenges, including upcoming labor market data, third-quarter earnings reports, and the U.S. election, are expected to dictate whether these positive market trends will continue in the coming weeks.

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As the month draws to a close, it appears that the feared "Septembear" has been largely avoided, with the S&P 500 and other major indices showing resilience despite concerns about inflation, interest rates, and geopolitical uncertainty. Investors will be watching closely as new data and developments unfold in the weeks ahead.

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