Nearing a Better Season

Thoughts and prayers to all those in Israel and the rest of the Middle East affected by this weekend’s horrible events.  Taking a line from Josh Brown, “if you’re selling US stocks today because you’re waiting for a calmer, more peaceful time in the Middle East to buy back in, you’ll be waiting for the rest of your life”. This unfortunately has been the status quo there for thousands of years.

The S&P 500 index closed green last week rising by +.5% with all the gains coming on a strong Friday session.  The market ended Fridays at 4,308, up from 9/29/2023, Friday’s closing level of 4,288. This marked the first weekly increase since the last week of August. The index is still in positive territory for 2023, with a +12% year-to-date rise.

The S&P 500 closed out a normally tough summer quarter dropping – 3.6% in Q3, marking its first quarterly loss since Q3 of 2022, amid interest rate concerns. The S&P 500 had climbed in the first 6 months of 2023 on optimism for the Federal to stop raising rates, and a soft landing in the economy, but some investors are now bracing for another potential increase in November.  Economic data last week was mixed with September nonfarm payrollsreleased Friday showing last month’s US nonfarm payrolls jumped more than expected despite higher interest rates and elevated inflation.  Almost all the positive surprises were government workers and teachers heading back to work.

The growth in wages came in lighter than expected which prompted Friday’s rally.  The September unemployment rate remained at 3.8%, slightly higher than the 3.7% rate expected, as the labor force grew only modestly.

The Communication service sector led the gains last week, climbing +3.1%, followed by a +2.9% rise in technology. The health care sector also rose, climbing +0.9%.  All other sectors fell, led by a -5.4% slide in energy, a -3.1% decline in consumer staples and a -2.9% drop in utilities.

In communication services, shares of Alphabet (GOOG, GOOGL) rose more than +5% on the week as the Google parent company unveiled its latest series of Pixel smartphones. The technology sector’s strongest gains came from semiconductor chip makers  Advanced Micro Devices (AMD) and NVIDIA (NVDA). AMD rose +4.3%, while NVIDIA’s shares climbed +5.2%. NVIDIA’s stock climb came after KeyBanc boosted its price target on the stock to $750 per share from $670.

On the downside, the energy sector’s drop came as crude oil futures fell on the week. Decliners included Valero Energy (VLO), down almost -11%, and Devon Energy (DVN), down -8.4%.  Higher prices are hurting gasoline demand.

We continue to track “normal” seasonals almost to the week.  See below charts:

Chart titled "Still a Textbook Seasonal Correction" - chart on last ten pre-election years

Volatility as measured by the VIX Index Seasonality: still a “normal 2023”

Chart titled "VIX Seasonality (average daily level of the VIX)"


Sentiment is now dour, opposite the market peaks in July.  Per data from Merrill Lynch, using their “Sell-Side Indicator, (SSI)” that tracks sell side strategists average equity allocation as a contrary sentiment trading indicator.  These level readings have historically produced above average returns over the next 12 months.  These returns have also had a high rate of occurrence.  Their current indicator level indicates a +15% potential price return over the next 12 months (S&P500 at +4900).  When their indicator has been at this level or lower, the 12-month forward returns were positive 95% of the time with a median return over 21% (S&P500 at over 5100).  No guarantees of course.

Chart titled "Exhibit 7: The S&P500 tends to exhibit the weakest returns during "sell" vs other thresholds








Screenshot of B of A Global Research Newsletter





The Markets reaction the last escalated Israel and Palestine conflict in July and August of 2014.  Israel began a major offensive push into Gaza after three Israeli teenage boys were kidnapped and murdered by Palestinian terrorists. The war went on for a few weeks and thousands were killed as a result.  The S&P 500 fell as the war intensified but as you can see in the chart below.  Eventually investors got acclimated to the fighting as a backdrop. The effect of this conflict, like many conflicts before and since, didn’t produce a lasting or meaningful effect on US stocks.

Oct 9, 2023 Chart  of S&P500 since June '14

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Week Ending 10/6/2023 Cumulative Total Returns