Why Investors Should Approach Two Stock Market Sectors with Caution
As the fourth quarter approaches, typically known for its positive market momentum, some technical signals are causing analysts to pause, especially regarding the technology and energy sectors. Despite a robust performance in September, with the S&P 500 hitting its 42nd record close of the year, concerns about underlying volatility within these two key markets warrant careful attention.
September Surprises and Market Performance
Traditionally viewed as a challenging month for stocks, September has defied expectations this year, with the S&P 500 gaining 1.7% thus far, demonstrating resilience against historical trends. Jeffrey Rubin, the president and director of research at Birinyi Associates, reflects a broader sentiment in the market, indicating that seasonal patterns might captivate interest yet often fail to yield profitable investment strategies. He states, “Seasonalities might be interesting and are good for a sound bite or two, but too often and most importantly, they are not profitable.”
Technical Indicators Driving Caution in the Technology Sector
Rubin’s analysis identifies a lack of upward movement in the technology sector, specifically within the Invesco QQQ Trust Series I (QQQ) and the Technology Select Sector SPDR ETF (XLK). These indices have seen significant price fluctuations since early June, trading within defined ranges: $203 to $233 for XLK and $443 to $496 for QQQ. Rubin advises against buying at the top of these trading ranges, suggesting that investors should adopt a more cautious approach: “In other words, smaller bites and shorter time frames are now appropriate for the Nasdaq 100 and the technology sector ETF until the current range-bound trading changes.”
Energy Sector Faces Downward Trends and Challenges
In addition to concerns surrounding technology, Rubin casts a wary eye on the energy sector as reflected in the Energy Select Sector SPDR ETF (XLE), which he views as being in a downtrend. With oil prices 26% lower than the same time last year, the likelihood of a rebound to previous highs—barring unforeseen geopolitical crises—seems slim. He notes, “As a result, we will be avoiding investment purchases of energy-related companies as very few of the 22 members in the sector qualify as a buy, sans the pipelines.”
For those considering trading within this sector, Rubin suggests trimming long positions into any rallies, particularly since the XLE currently resides in the middle of its trading range. He affirms that involved trades should be cautious due to the broader declining trend seen across the energy sector, where only a few companies are noted for uptrends.
Key Players in the Energy Sector: Trends and Recommendations
While many energy sector members are floundering in downtrends, certain exceptions exist that may still present viable opportunities. Rubin identifies companies such as Williams (WMB), ONEOK (OKE), Targa Resources (TRGP), and Kinder Morgan (KMI) as being in an uptrend. In contrast, several major players like Exxon Mobil (XOM), EOG Resources (EOG), and Baker Hughes (BKR) find themselves in more neutral territories, while others like Chevron (CVX) and ConocoPhillips (COP) remain in downtrends.
Understanding Market Dynamics and Making Informed Decisions
As investors evaluate their portfolios ahead of the typical positivity of the fourth quarter, the implications of Rubin’s analysis emphasize a cautious stance, particularly focused on the technology and energy sectors. By understanding the technical ranges and recognizing the fluctuating trends within each sector, investors can make more informed decisions amidst the uncertainties posed by broader market conditions.
The markets remain poised at the opening bell, indicated by higher U.S. stock indices like the S&P 500, but with benchmark Treasury yields dipping and oil prices remaining relatively flat, the cautious approach urged by analysts may help navigate the complexities ahead as the year draws to a close.
