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Making Money in a Historically Bad Month

Should we start with the good news or the bad news?

Actually, the bad isn’t bad at all. But I’m a positive person by nature, so let’s go for the good…

We’re already halfway through what is historically the worst two months of the year for stocks.

And now the bad…

We’re only halfway through what is historically the worst two-month stretch of the year for stocks.

I pulled the data going back to 1990, and the pattern is clear…

And now for even better news: Considering the seasonal headwinds and low summer trading volume, August turned out pretty well – especially after that wild start.

Our TradeSmith Investment Report stocks have gained 2.1% on average this month, which easily tops the S&P 500 and the Dow Industrials’ 1.2% bump and crushes the Nasdaq’s –0.5% move.

To a data nerd like me, it’s been a fascinating month. If we look at my system’s Big Money Index (BMI), which measures money flow from the biggest investors on the planet, we see very little change in August. It’s the yellow line below, and it started the month at 65.0 and came into today’s trading at 65.6.

Source: MAPsignals.com

It’s a proprietary calculation based on the Big Money buy and sell signals my system detects and displayed as a moving average over 25 trading days. In this case, today’s BMI means 65.4% of all Big Money signals are buys. That’s a healthy market.

But look at the market as measured by the SPDR S&P 500 ETF Trust (SPY). That’s the blue line, and we see that stomach-churning drop at the beginning of the month followed by one of the fastest recoveries I’ve ever seen.

August ended up as a month of volatility without retreat. And after the holiday weekend, we begin September trading, which is typically harder on stocks. Nobody can say if that pattern will hold this year because 2024 adds a couple of market-moving events, with a presidential election now just two months away and investors as certain as I’ve ever seen them that the Federal Reserve will cut interest rates in three weeks.

Fed Chair Jerome Powell was surprisingly forthcoming in his speech from Jackson Hole, Wyo., last Friday, saying the time has come for cuts. Well, he technically said “the time has come for policy to adjust,” but you don’t have to be fluent in Fedspeak to know what that means.

Rate cuts are bullish, and this time around could be better than usual. Past rates have often been in times of recession or sluggishness to stimulate the economy. But there is no recession right now, despite a brief flareup of irrational fears earlier in August. Just this morning, second-quarter economic growth was revised up to a 3% annual pace.

Adding fuel to the engine, we still have that record stockpile of cash sitting in money market accounts – an astonishing $6.44 trillion, according to official Fed data. With yields on those accounts about to follow interest rates down, stocks are set to offer much juicier returns than money markets and other cash-like accounts.

We still have some seasonal and election-related volatility ahead of us, so stay prepared for that. But the probability of a big year-end rally has increased, and the stocks we own – with market-leading fundamentals, strong technicals, and Big Money inflows – are likely to be among the biggest winners.

That gives us a great opportunity to add to our already big profits. We wrap up August with 21 of our 23 stocks in the green and an overall average gain of 27.5%.

The data tells us to expect higher prices in the last quarter of the year, when election outcomes become known, and when interest rates fall. We have all three of those coming in 2024, which could give us one heck of a ride.

Two More Earnings Beats Keep Things Rolling

In an otherwise quiet last week of summer, two of our companies reported quarterly results. Both were just what we like to see.

Veeva Systems (VEEV) jumped 9% today after a strong report last evening after the close. Earnings jumped 34% over last year to $1.62 per share, nicely ahead of the Street’s estimate for $1.53. Sales grew 15% to $676.2 million, which also topped analysts’ expectations.

Revenue guidance for the current quarter and the full year was pretty much in line with expectations, but earnings guidance came in above the consensus. Management expects $1.57 to $1.58 per share this quarter, ahead of the $1.55 estimate, and about $6.22 for the full year, ahead of the $6.17 estimate.

When profitability increases faster than sales, you know profit margins are increasing. That’s true with VEEV, and is something else I like to see and that my system screens for.

Veeva also operates in a growth industry. It was actually the first cloud software company for the life sciences industry. Its software helps companies bring new medicines and treatments to patients faster, managing applications for clinical operations and data, manufacturing quality, and commercial uses like customer relations, content, and more.

Source: MAPsignals.com

VEEV struggled earlier in the year, especially after its last earnings report. It wasn’t a horrible report, but guidance wasn’t what investors hoped for. The selling was an overdone kneejerk reaction, and today’s pop puts it back above where it was before the May slide.

VEEV is a good stock to own heading into the end of the year, so continue to hold.

Salesforce (CRM) also reported last evening, and the enterprise software behemoth earned $2.56 per share, up a hefty 21% from a year ago and easily topping analysts’ estimates for $2.35.

Sales grew 8% to $9.33 billion in revenue, ahead of estimates for $9.22 billion. I also like that the operating margin increased more than two percentage points to 33.7%, while operating cash flow (free cash flow minus capital expenditures) grew 10% to $890 million.

Sales guidance for the current quarter was slightly under the consensus estimate of $9.41 billion, which was probably the reason for today’s muted action. But more importantly, the company maintained full-year revenue expectations and raised the full-year earnings forecast to $10.03 to 10.11 per share. Analysts were estimating $9.89.

After a harsh sell-off following the last earnings report, CRM has bounced 19% and filled that big gap. The next breakout would come around $275, and this latest earnings report makes it all the more probable.

We’re up over 30% at the moment. Continue to hold for additional upside.

Markets Closed Monday

Just a quick reminder that markets are closed Monday for Labor Day. Our TradeSmith offices are closed as well.

It’s nice to go into a long weekend with almost all of our stocks making us money and very few if any concerns. Relax and enjoy.

Volume will likely pick up next week, and we could see some price swings as investment managers get back to work after some time away.

But we can handle volatility, and even use it to our advantage to add more elite stocks. I’m already working on some possibilities, and I expect to have more for you next week.

Have a happy and safe holiday weekend!

Talk soon,

Jason Bodner
Editor, TradeSmith Investment Report