Stock Market: What Lies Ahead?
Caution Urged in Two Key Stock Market Sectors: Technology and Energy
A Downtrend Amid Lower Oil Prices
With September drawing to a close, many investors who feared the so-called "Septembear" may now find themselves pleasantly surprised. Contrary to the typical warnings about September being a tough month for stocks, the S&P 500 has risen 1.7% this month, marking its 42nd record close of the year. This surge comes despite widespread market volatility earlier in the quarter.
Jeffrey Rubin, president and director of research at Birinyi Associates, is one expert advising caution, but not necessarily for the reasons tied to traditional seasonal concerns. Rubin dismisses the notion of seasonality affecting market behavior. Instead, he focuses on technical trends, particularly in the technology and energy sectors, which he believes warrant investor prudence.
Technology Sector: Range-Bound and Cautious Opportunities
Rubin's view on the technology sector, tracked through the Invesco QQQ Trust Series I (QQQ) and the Technology Select Sector SPDR ETF (XLK), is one of cautious neutrality. While the firm hasn't turned bearish on tech stocks, Rubin observes that both QQQ and XLK have been range-bound since early June, trading in wide but confined bands.
This range-bound movement, with QQQ fluctuating between $443 and $496 and XLK between $203 and $233, suggests that the sector is lacking clear direction. Investors should refrain from buying at the top of these ranges, as there’s no strong evidence the sector will break out to new highs in the near term. Instead, Rubin recommends a strategy of "smaller bites" with shorter investment time frames. This approach allows investors to take advantage of dips at the bottom of the trading range rather than chasing prices at the peak.
AI and Semiconductor Demand: A Silver Lining
Despite the overall caution, some tech stocks are showing significant upside potential. For instance, Micron Technology has recently surged on the back of strong demand for semiconductors driven by the booming artificial intelligence (AI) industry. AI continues to be a major catalyst for growth in the tech sector, and companies heavily involved in AI hardware and software development could see gains even amid general market uncertainty. Investors should monitor AI-related stocks for potential opportunities, especially as demand for advanced chips and computing infrastructure grows.
Energy Sector: A Downtrend Amid Lower Oil Prices
Rubin’s outlook for the energy sector is decidedly more bearish. The Energy Select Sector SPDR ETF (XLE), which tracks the energy sector, is currently in a downtrend. Rubin attributes this to the sharp decline in oil prices, which have fallen 26% compared to last year. Barring a major geopolitical crisis in the Middle East or other supply disruptions, Rubin believes oil prices are unlikely to revisit their 2023 highs.
This downtrend has been reflected in the majority of energy stocks. Companies like Chevron, ConocoPhillips, Occidental, and Schlumberger are all underperforming and in a downtrend. Rubin advises against making substantial investments in these energy companies, except for select pipeline firms that remain in an uptrend.
Pipeline Companies: The Exception
The few bright spots in the energy sector include pipeline companies like Williams, ONEOK, Targa Resources, and Kinder Morgan. These companies benefit from stable cash flows due to the nature of their business, which involves transporting rather than producing oil and gas. As such, they are less sensitive to fluctuating oil prices compared to traditional exploration and production firms. Rubin suggests that these stocks could offer some relative safety and even growth potential for investors looking to maintain exposure to the energy sector.
Broader Market Sentiment: What Lies Ahead?
The broader U.S. market has shown resilience, with U.S. stock indices opening higher on Thursday following favorable personal consumption expenditure (PCE) inflation data. The core PCE, which is closely monitored by the Federal Reserve, rose 2.7% year-over-year in August, aligning with expectations. This softer-than-anticipated inflation reading has tempered concerns about aggressive interest rate hikes, leading to a dip in Treasury yields and providing a boost to equities.
Economic data continues to play a key role in shaping market sentiment. Jobless claims have undershot forecasts, and durable goods orders have come in stronger than expected, both of which signal a resilient U.S. economy. Additionally, revised government data suggests that economic growth in recent years was stronger than previously estimated. Investors will be closely watching Friday's release of data on personal income and spending, along with the Fed's preferred inflation gauge, for further indications of economic health.
Chinese Stocks and Global Trends
Another area of interest is the Chinese stock market, where shares have rallied following Beijing’s announcement of new measures to support its weakening economy. This rally in Hong Kong and mainland China has been welcomed by global investors who are concerned about China’s slowing growth, which has been exacerbated by the country's real estate debt crisis and declining consumer confidence. Continued government support could bolster Chinese equities, but uncertainty remains high.
Energy Prices and Market Impact
One factor contributing to the energy sector's downtrend is the recent fall in U.S. oil prices. A report indicating that Saudi Arabia may stop trying to prop up oil prices with production cuts has weighed on the market. If the trend in oil prices continues, it could lead to further pressure on energy stocks, particularly those heavily tied to exploration and production activities.
What Investors Should Do: Key Takeaways
Given the current market environment, investors are advised to proceed with caution, particularly in the technology and energy sectors. Here are some key takeaways:
Technology Sector: Investors should be selective, focusing on opportunities within AI and semiconductors, while avoiding buying at the top of the trading range in major ETFs like QQQ and XLK.
Energy Sector: Pipeline companies offer a safer bet amid falling oil prices, while traditional exploration and production companies face headwinds.
Broader Market: Economic data remains crucial, and with inflation moderating and economic growth proving resilient, there may be more room for stock gains. However, geopolitical risks and policy uncertainty — particularly in China and the Middle East — still loom large.
As Rubin and other analysts have pointed out, investors should remain vigilant, monitoring both technical indicators and macroeconomic trends to navigate the remainder of the year. With volatility likely to persist, a balanced approach focusing on both caution and opportunity is the best way forward.