Trying to Reason With Wall Street’s Hurricane Season

Jimmy Buffett died on September 1, aged 76. I’m a big fan of Buffett’s music, especially his 1974 album “A1A,” on which you’ll find one of my favorite songs: “Trying to Reason With Hurricane Season.” The tune typifies his tropical escapism, with a dark undertone: “Squalls out on the gulf stream, big storm comin’ soon…”

As evidenced by Hurricane Idalia, Atlantic hurricane season typically peaks during the first week of September, with most activity occurring between mid-August and mid-October.

September-October also is historically the worst-performing period of the year for the stock market. September is the only month that shows a decline, on average, over the past 100 years.

For clues as to how you should navigate the coming financial storms, I spoke with Dr. Joe Duarte, chief investment strategist of our premium trading service, Profit Catalyst Alert.

Dr. Duarte (pictured here) has been a professional investor and independent analyst since 1990. He is a former registered investment advisor and author of the bestselling Options Trading for Dummies, and several other books including Market Timing for Dummies and Successful Biotech Investing.

I’ve edited the following interview for concision and clarity. My questions are in bold.

Joe, you’re not just a medical doctor and an investment advisor. You’re also a jazz guitarist. I know you were a Jimmy Buffett fan.

Who wasn’t a fan? I saw him live a few years ago, closer to his prime, and I went home with a big smile.

All the advisors on the Investing Daily team rely on technical indicators to some degree, but you place particular emphasis on them. September-October is historically a volatile period for the stock market, with a downward bias. What are the charts telling you right now?

The charts are painting a picture of indecision. The cause is monetary policy. There is fear on Wall Street of the Federal Reserve raising rates yet again in late September. But there is greater fear of the bond market. The U.S. Ten Year Note yield (TNX) is again knocking on the door of an upside breakout. If TNX makes a decisive move above the 4.5% area, it will cause all kinds of problems for stocks.

Already we’ve seen trouble in housing-related sectors. Higher bond yields could spread the pain to a broader segment of the equity market.

During Wall Street’s “hurricane season,” as it were, how should investors position their portfolios? To weather the coming storms, which assets make the most sense?

As you know, I’m a fervent advocate of investing in what’s working. Currently, the area of the market that is attracting the most money is energy. That means oil, especially the oil services and oil exploration stocks. OPEC+ just reaffirmed its production cuts and crude prices have been resurgent. Shrewd investors are increasing their long positions in energy assets.

Of course, the most important factor for any investment is how it’s acting in relationship to the market. If you own a stock that’s performing well, even though it occupies an out-of-favor sector, there is no reason to sell it.

Despite the seasonality we’re discussing, long-term trends are still in place that are bullish, isn’t that correct? What are some of the reasons for optimism?

Traditionally speaking, the third year of the Presidential Cycle is the most bullish. So far, tradition has held up. Despite a slump in August, we’ve enjoyed solid stock market gains year to date. It’s a tug-of-war between sentiment and seasonality.

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We are now in that part of the year where pivotal decisions for the fourth quarter are being made by hedge funds, mutual funds, and other big money investors. Many of them have missed the rally and need to play catch-up to retain disgruntled clients.

That means that some areas of the market will see increased money flows. Again, energy has momentum for now. We may also see another artificial intelligence-related rally. A downside reversal in bond yields would likely benefit the housing sector.

The biggest reason for optimism is that the Fed may be forced to lower interest rates sooner than it expects. However, therein lies a problem. For the central bank to do so, the economy has to show signs of slowing. It’s a conundrum for the market.

Again, investors should look to the bond market for clues. If that Ten Year Note yield starts to turn lower, it’s important to see how stocks respond.

Do you expect the Fed to hit the “pause” button on its rate tightening cycle when it next meets, September 19-20? And if so, how are stocks likely to respond?

If I were running the Fed, I would stop raising rates and give the already enacted rate hikes time to deliver. There are emerging signs such as falling mortgage demand, a cooling in housing starts, and plenty of purchasing manager and regional Fed bank surveys that suggest the economy is slowing.

The Fed’s hawks are ignoring these signs while some of the more pragmatic members of the policy-making Federal Open Market Committee are calling for a pause.

But I’m not running the Fed. Thus, if history is any guide, the Fed will act when the economy is already slowing significantly, which means that stocks will be volatile over the next couple of months.

As a result, I would not be surprised to see the Fed hike rates in September and to frame it as an insurance rate hike.

You’re adept at spotting under-the-radar portents. What’s a salient trend that most investors are currently missing?

My worry is that the areas of the country which have been showing economic resiliency, such as the sunbelt and the southeast, are starting to show signs of slowing. At the same time, the areas of the country that are weaker may be slowing down, too.

I rely on technical indicators, but I also take into account my personal in-the-trenches observations. For example, a housing development near where I live in the Dallas-Fort Worth area was rapidly filling up with new homes being built. Now, it’s progressing at a much slower pace. Other building spots which I monitor are stalling.

Building material companies are starting to report slowing sales. The recent U.S. jobs report showed a slowing jobs market. But the Fed lives in its own world.

The bottom line is that the Fed may go too far with rate hikes and make things worse than they already are. The September-October period is likely to be stormy for investors. Batten down the hatches.

Thanks for your time. I think you’ve earned a margarita.

Margaritas aren’t bad, but I prefer gimlets. Regardless, hoist a libation in honor of Jimmy. He was an American original.

Editor’s Note: In the above interview, Dr. Duarte has given you invaluable investing advice. But we’ve only scratched the surface of his expertise.

You should know that Dr. Duarte recently pinpointed a tiny, unknown company that has developed a revolutionary “black box” technology. You need to get in on the ground floor of this game-changing opportunity before the investment herd finds out and sends the share price soaring. Click here for details.

John Persinos is the editorial director of Investing Daily.

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