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September Market Outlook

How are you feeling about the market this September? If you’re worried, you’re in good company.

How are you feeling about the market this September? If you’re worried, you’re in good company.
The percentage of bulls, as measured by the Investors Intelligence sentiment survey, just fell to its lowest level of the year, at 37.1%. In addition, the percentage of advisors putting themselves in the “correction” camp, at 39.2%, now exceeds those in the bullish camp for the first time since June 2012.

Investors Intelligence notes that the bears are still the smallest group, at 23.7%, and have barely added to their members this week. However, the survey did find “more expressions that the bull market is close to ending its record run as far as time goes.”

Indeed, ever since the possibility of military intervention in Syria became the leading news story here, advisors have taken on a more pessimistic tone, regardless of their overall outlook.

One Dick Davis Digest contributor wrote yesterday:

“Stocks opened strongly but gave up the majority of their gains when it appeared that President Obama will obtain Congress’s approval to bomb Syria. The S&P 500 Index ended the day ahead 0.4%.

“As expected, our models have downgraded from outright bullish to neutral-bullish. Under such conditions, historically, stocks have risen, but have experienced twice the risk as under outright bullish conditions. As a result, we have reduced client equity exposure by approximately 1/4.”

That’s a pretty cautious sounding bull.

Likewise, many advisors from the correction camp are now calling for “further downside” here, even though the Dow has already corrected over 5% from its August 2 high. Many of those in the correction camp insist that a 10%-15% correction is necessary, including Digest Contributor Richard Rhodes, who wrote yesterday:

“The S&P 500 remains above the 160-week moving average long-term support level at 1363; and the standard 200-day moving average support level at 1562. But perhaps more importantly, the distance above the 160-day ‘failed’ at the +23- to +25% zone that is our ‘bubble-like rally’ threshold. Hence, a correction of some proportion is forthcoming—perhaps -15% or more.” But Rhodes is not a bear, in fact, he made it a point to note: “We believe this is a decline of intermediate-term proportion at this point; more evidence is needed to declare this is a bear market decline of -20% or more.”

McClellan Market Report Editor Tom McClellan is also in correction mode, in fact, he expects several months of cascading corrections ahead. He wrote yesterday: “It is correction time for stock prices, a period likely to last into November, or possibly December before we get a real up move. Until then, we should see a lot of bottoms that investors will think are the final one, only to be disappointed. By late November, when everyone has given up hope, it will finally be time for prices to start back upward again. Look for stocks to make an accelerated down move into a bottom due September 18, but that won’t be the last of it.” Other negative voices are not hard to find among our Dick Davis Digest Contributors. One wrote Tuesday: “We believe the Market is headed LOWER—and would be cashing in on those large positions with lots of profits or lots of money invested. We would be going to the sidelines and waiting to see what happens regarding Syria.”

PAD Systems Report Editor Dan Seiver is also bracing for downside, writing on September 1: “It’s an old Wall Street adage: ‘Nobody rings a bell at the top.’ But with the bull market over four years old, valuations stretched, and crises on stage and waiting in the wings, we think we heard something. August’s decline, while relatively mild, could presage further declines this fall, especially since September has historically been the weakest month of the year for stocks.”

He’s maintaining cash reserves of around 50%.


And then of course there’s the 23% of advisors who are downright bearish here. They include the Editors of The Elliott Wave Financial Forecast, who argued in their latest newsletter that August’s correction actually marks “the start of a broad stock market decline that will unfold over the coming years. The negative social mood behind it will influence all realms of social life.”

It’s all quite depressing... if you take the comments at face value.

Of course, there is an alternative: the contrarian perspective. Contrarians believe that the best time to buy is when everyone else is at their most fearful. But is market sentiment low enough today to conclude that we’re at a “blood in the streets” moment? It’s never possible to say exactly—sentiment could always go lower—but from most perspectives today, things do look pretty grim.

At least one of our Digest Contributors thinks we’re at an inflection point here. Here’s what John M. Boyd wrote in Fidelity Monitor & Insight on Tuesday: “It’s no wonder that fear has gripped the retail investor. Recently, the American Association of Individual Investor’s weekly survey of its members showed 49% to be bearish versus a long-term average of 30.5%. While bearishness since ticked down a bit, it had moved higher for six straight weeks. And things are no better among the pros. The Sell Side Consensus indicator developed by Bank of America Merrill Lynch (which measures the recommended level of equities from nine major brokerage firms) sits at just 52.3%, well below the average of 60.4%. Indeed, August was a dismal month with the S&P 500 falling 2.9%. “But the market is a perverse entity. As the old saying goes, ‘the market tends to move in the direction that causes the most pain to the most people.’ In this case, with most everyone waiting for the next shoe to drop and the market to crack, that would be for it to move higher.

“In fact, if we return to the AAII sentiment data, Bespoke Investment Group points out that, historically, when bearish sentiment has increased for five straight weeks the market has been higher by an average of 9% over the next six months.

“Furthermore, Bank of America notes that when their Sell Side indicator has been as low as it is now, total returns on the S&P 500 over the next 12 months have been higher 95% of the time, with a median return of 27%.”

Of course, neither of those studies is specific enough to have any bearing on what happens over the next month—the market could continue to correct through September and still easily deliver on the promise of 9% returns over the next six months and gains over the next 12. So being a contrarian here doesn’t necessarily mean loading up your portfolio with a bunch of new names. It might just mean being ready to recognize and take advantage of the uptrend when it starts again. Or it might mean doing some cautious buying of names that are holding up well, like some of the strong market-leading growth stock that have ignored August’s decline.


In fact, if your contrarian streak is giving you an itch to buy here, there are plenty of good names available. The last few months’ divergence between growth stocks and conservative investments has been large enough that plenty of growth stocks still have great-looking charts here. Looking at the charts of growth leaders like Yelp (YELP), you wouldn’t even know there was a correction going on.

One stock from that category that I particularly like is Cabot Oil & Gas (COG). Rather than correcting in August, the stock hit new highs. And Robert Rapier and Igor Greenwald, Digest Contributors who had previously recommended the stock in their newsletter, The Energy Strategist, decided to raise their buy limit on the stock.

They originally recommended the stock around $34 (split-adjusted) in March. Here’s their update from the latest Investment Digest:

“In the energy sector, you can have very rapid production growth or capital spending within the limits of free cash flow. But very seldom do you get both from the same company, much less one with a track record of delivering on a variety of other operational and financial metrics.

“When you find a unicorn like that, you’ve got to ride it as far as it will go. This is why Cabot Oil & Gas (COG) remains not just a Growth Portfolio Best Buy but our favorite idea in the entire energy universe.

“The quarterly results reported last week continued to exceed those high expectations. The leading gas driller in Pennsylvania’s Marcellus shale formation reported adjusted second-quarter earnings of 45 cents a share, 6 cents above the consensus estimate, along with a 52% year-over-year increase in production and a near-doubling of cash flow from operations.

“Those results don’t even reflect the recent startup of a compression station that appears to have given a 15% production boost to the connected Cabot wells, encouraging the company to lift its annual production growth forecast to a range of 44% to 54%, up from 35% to 50% previously. Cabot also continued to see strong flows from ‘step-out’ wells outside its main production area in northeast Pennsylvania, and as a result is bringing in a sixth drilling rig and possibly a seventh one next year, providing a further boost to its already bright outlook for 2014 and beyond.

“Meanwhile, total unit costs were down 28% year-over-year, so growth will continue to be financed by the swelling cash from operations. While natural gas prices have been weak of late, Cabot is well hedged in the near-term and is unlikely to sustain a material hit so long as prices stay above $3 per thousand cubic feet (Mcf). At the same time, the company retains the upside exposure to a long-term move above $5 per Mcf, expected by many analysts once exports of liquefied natural gas (LNG) begin in 2016.

“Cabot celebrated its recent good fortune by doubling the quarterly dividend to 16 cents a share as part of the forthcoming 2:1 stock split.

“The company also reported strong oil drilling results in the Eagle Ford shale in south Texas, and is shifting a rig there from its Marmaton Oklahoma play. But this remains primarily a natural gas story, one that is already strongly profitable and is poised to get more lucrative still.

“In the aftermath of the report, the stock shot up to a record high, moving well above our buying point. Stifel raised its price target up to $85 [$42.50 split adjusted], while Howard Weil raised its sights to $91 [$45.50 split adjusted] and Oppenheimer bid $100 [$50 split adjusted], suggesting upside into triple digits should natural gas get significantly more expensive.

“The stock is likely to oblige, barring another collapse in natgas prices that seems like a remote possibility at this point. This is a position still very much worth building and we’re raising our price target accordingly. Buy COG below $85 [$42.50 split adjusted].”— Robert Rapier and Igor Greenwald, The Energy Strategist,, 800-832-2330, July 29, 2013

Before I go, as usual when I write about sentiment, I’m curious to know how our readership is feeling. If you have a minute, reply to this email and tell me your current feeling on the market.

Wishing you success in your investing and beyond,

Chloe Lutts Jensen
Editor of Dick Davis Investment Digest and
Dick Davis Dividend Digest

Chloe Lutts Jensen is the third generation of the Lutts family to join the family business. Prior to joining Cabot, Chloe worked as a financial reporter covering fixed income markets at Debtwire, a division of the Financial Times, and at Institutional Investor. At Cabot, she is a contributor to Cabot Wealth Daily.