August closed as the last trading day of the month with gains and a breakout to new highs, better than many expected. That sets up September, which holds the record as the worst month for the S&P 500 - and that reputation is earned.
Why September tends to be weak
September splits into two parts. The first 10 days usually hold up fine. Trouble starts around the 10th day - mark September 14th - driven by end-of-quarter rebalancing and seasonal cash needs (paying college tuition means tapping the market). This year adds midterm elections, which will bring a lot of political noise that could unsettle stocks. A small pullback would not be unusual.
The dominoes are lined up for a pullback. The S&P 500 has not had a 5% retracement. The level to watch is 7620 - the market sits just above it now, and that is where it broke above on August 4th. A retest and hold there matters.
Earnings season is over, so focus shifts to Fed Chair Warsh and a possible September rate hike, priced at roughly 54%. I do not think he hikes; more likely he pushes the decision further down the road. A heavy data run is coming: unemployment on Friday, then Labor Day weekend slows things down, then CPI and PPI before the Fed meeting.
October brings more market lows than any other month and usually marks the pivotal turning point, after which the year finishes strong. I expect that to play out. The open question is whether September stumbles and how deep the stumble goes before the October-November-December recovery.
Seasonality and how to use it
Should retail investors base portfolio decisions on seasonality? No - that is a mistake. Acting on it, you would be wrong about 55% of the time. Many Septembers buck the trend. Watch the general trend instead: this remains a secular bull market with pockets of strength and pockets of weakness.
Software leading, semis shaky
Software is coming back; semiconductors are still shaky. Nvidia (NVDA) is the clear example. Last week it crushed earnings with a revenue guide far above expectations, gapped higher to 230, but did not make a new high - 235-236 was the prior high - then pulled back. The follow-through instead showed up in software.
That created a divergence: semis rising while software fell, now reversed, with software "gapping and going." Snowflake (SNOW) started this three months ago and reports later this week - the question is whether it can keep climbing. Microsoft (MSFT) gapped and never went lower. Palantir (PLTR) gapped and never went lower. Salesforce (CRM) gapped, with two straight days of gains since earnings. Software holds the momentum; the momentum divergence is showing up in semis.
Broadcom this week
I expect Broadcom (AVGO) to beat with a phenomenal guide, but the price reaction is uncertain, much like Nvidia's. AVGO trades right at its 200-day moving average - the health barometer for technicians. There is heavy resistance above: the 50-day moving average is turning over near 390, and the old high is 425. If Broadcom rallies, it likely meets more resistance than support - more headwinds than tailwind - which is a concern.
The generals
Microsoft (MSFT) leads among the software space, one of the Magnificent Seven. Cyber names have done well but are showing bearish momentum divergences, seen in CrowdStrike (CRWD). The test is whether Palo Alto (PANW) can buck that.
Among the big generals, Apple (AAPL) is a major story this week with a CEO transition; it has climbed slowly and steadily like a staple utility. The tech names that used to lead have not been leading. That the market keeps rising while the generals rest speaks to the bull market's strength - when the leaders stall, others pick it up.
Tesla (TSLA) is no longer discussed and is close to falling out of the top 10. Meta (META) still looks weak despite a major ruling and settlement last week. I want Nvidia (NVDA) back in the lead - it is still close and had a chance.
Why should Nvidia lead? Its weight helps, since it is the most heavily weighted stock in the world with a $5 trillion market cap. More importantly, Nvidia leading would pull semiconductors up, including Broadcom (AVGO), a top-10 stock.
Data centers and other risks
Heading into the midterms, data centers are a big topic and rare bipartisan common ground: about 70% of both parties do not want data centers in their neighborhood. People favor data centers, just not nearby. The pushback has been large - New York is delaying for a year - which could cause problems, though not right now. Earnings have been great, but momentum is slowing.
DRAM stocks ran hot for six months, then Micron (MU) and SanDisk (SNDK) slowed. Momentum is waning but the group looks to be consolidating before its next leg higher.
Where the strength is
Energy is not where you want leadership. Materials look great. Gold is starting to break out. Bitcoin and alternative asset classes are back on the radar and look to have room to run. These pockets of strength exist but are not enough to push the market much higher from here. Combined with the seasonal factors, that could mean a pause in the rally - which would set up a strong November-December finish that I expect.
Palo Alto
Palo Alto (PANW) should be a good guide - the question is whether it can make a new 52-week high. CrowdStrike (CRWD) did not, but that was only two days ago and can be turned around with a couple of upgrades or a new contract. Both PANW and CRWD are stocks to own and hold long term. Near-term, both are struggling, which should offer chances to buy the dip in the next week or two.
