We're Buying This Name as September CPI Calls for Some Market Protection
We are getting incrementally defensive given the market’s valuation and near-term setup.
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| Symbol | Transaction Type | # Shares Traded | Recent Price $ | Shares Owned After Trade | % Portfolio |
|---|---|---|---|---|---|
SH | Buy | 6,600 | $10.85 | 6,600 | 1.5% |
After you receive this alert, we will buy 6,600 shares of the ProShares Short S&P 500 ETF SH at or near $10.85. Following the trade, SH shares will account for 1.5% of the Portfolio’s assets.
Our thought that the September Consumer Price Index (CPI) could come in warmer than expected was confirmed with Thursday morning's report that revealed, as we can see in the table below, all four closely-watched figures for headline CPI and core CPI came in above market expectations.
Also sticking out is the sequential tick higher in the September core CPI figure to 3.3%, which is not going to go unnoticed by Fed officials, especially after last week’s September Employment Report and this week’s upward revision in the Atlanta Fed’s GDPNow model to 3.2% for the current quarter.
With four Fed officials making the rounds today, odds are that they will be offering up more restrained comments about rate cuts in the months ahead. Supporting that expectation, the 10-year treasury yield has moved up further, moving well past 4.0%. This puts the yield considerably higher compared to the recent bottom of 3.62% on September 16.
September PPI Likely to Surprise as Well
On Friday, we have the September Producer Price Index (PPI), and the surge we saw in the price component for the September ISM Services PMI to its highest level since January suggests we could see a repeat of Thursday in Friday's PPI data.
In thinking about that, the move higher in the last few weeks for oil suggests we may not see much in the way of helpful progress when we get the October inflation data.
The S&P 500’s P/E Valuation Is Stretched
As we mull all of this, last night the S&P 500 closed at 23.9x consensus 2024 EPS, which means its valuation has stretched even further compared to August and September. Tracing the S&P 500’s P/E valuation back to 1990, there have been only three times when its valuation was at even higher levels:
- In 2001, when it peaked at 29.8x as the S&P 500 EPS fell 41%
- In 2002, the S&P 500 peak P/E was 24x with modest EPS growth and the fed funds rate falling to 1.5% from 5.4% in 2001
- In 2020, when the global pandemic hit, and S&P 500 EPS fell almost 14% year over year, the S&P 500’s P/E valuation peaked at 27.1x
The scenarios behind those data points are not what we have on Thursday, and argue the market is looking a little toppy, especially as indications are the Fed could deliver fewer rate cuts than expected in the next few months.
We also have to consider the current environment that contains election uncertainty, hurricane destruction and selective consumers as we move deeper into the September quarter earnings season.
No doubt, there will be pockets of strength, and we’re well positioned for those with our holdings in the Portfolio, but the market’s valuation and investor sentiment flash “greed” suggests the bar for September quarter earnings and guidance is high with little room for disappointment.
We’re Getting Incrementally Defensive
We’ve seen this setup before, and it’s why we’re adding some shares of the ProShares Short S&P 500 ETF to help insulate the Portfolio should things get a little rocky as we move deeper into the current earning season.
Because we are using this as a tactical hedging tool for the Portfolio and do not expect to be long-term owners of the shares, we do not have a rating, nor do we have a price target.
What we will be watching are key support levels for the S&P 500, which you can see in the chart below. Should the S&P 500 move back toward the 50-day moving average or the 100-day moving average, subject to what else is occurring in the market, we may be inclined to dial back the Portfolio’s SH exposure or remove it completely.
We have our shopping list for existing Bullpen positions and the Bullpen, and our plan will be to let stock prices come to us.
More Pro Portfolio
- We're Locking in Big Gains on These Two Holdings
- Monthly Roundup: After a Great September, We Await Opportunities in October
- Market’s P/E Is Stretched — And So Is Its Dividend Yield
(Please note that we are looking to execute these trades at or near the share price mentioned above. Once the trade is completed, subscribers can see the trade's executed price here. Be sure to click on Closed Trade Gain/Loss and toggle the chart to sort by Purchase Date.)
