Traders were geared for action on Friday morning. With the S&P 500 (^GSPC:SNP) trading at a new intraday high, it seemed to be a case of selling news. After a choppy start to the week, the S&P closed up +1.3% and the Dow advanced to a new high, up 1.7%.
While the Wall Street Journal or Bloomberg talk about the uptick in positive economic data and the world’s largest IPO, Alibaba, I want to talk about what’s next. Yes, traders were encouraged by the Scottish vote to remain in the UK, but by the time the 8:30 bell rang most of the buying was already used up. Most who traded the S&P futures (ESZ14:CME) or options were focused on the September quadruple witching and then Alibaba. Not long after 9:30 the markets began to slow. In the old days the quad witching was one of the busiest days in the S&P pit, but today the only thing you hear is the bell ring and a few futures and options orders hitting the pits. After that it was a long, hard grind to 2:30 and a small pickup into the futures close.
On to the Next
The markets have a way of getting past things and last week was a good example of that. In the final 7 trading days of September the S&P will face the 3rd quarter rebalance, when mutual funds rebalance the basket of stocks in their portfolios to get rid of underperformers and buy more rising stocks. Like I said over a month ago, there could be some selling associated with the quarter-end rebalance and then into October we could see more selling before the markets find a solid bottom and rebound to new highs by the end of the year.
If the pattern of a new high followed by selling sounds familiar, then you should also not be surprised when the pundits start again calling for a crash. We expect a correction, but not a crash.
In Asia 9 out of 11 markets closed lower and in Europe 12 of 12 markets are trading lower. There is a busy economic schedule this week that includes 19 separate economic releases, 7 Federal Reserve bank presidents speaking and 7 T-bill or T-bond auctions or announcments. Today’s economic calendar includes the Chicago Fed National Activity Index, new home sales, New York Fed President William Dudley’s conversation at a conference in New York and earnings from AutoZone (NYSE: AZO).
Remember my saying “I may be bullish but I’m not foolish”? I may like the markets and think higher, but I also don’t want to get too far ahead of myself. The Monday after the Sept Quad Witch has been up 9 / down 21 of the last 30 occasions and the week itself is historically down. Will Mutual Fund Monday prevail? I am not sure about that. Our view is to sell the early rallies and buy weakness. I still think the ESZ14 is headed to 2020 but that doesn’t mean we can’t see a retest of Friday’s 1998.50 low or even lower first.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 9 out of 11 markets closed lower: Shanghai Comp. -1.7%, Hang Seng -1.44%, Nikkei -0.71%
- In Europe 12 of 12 markets are trading lower: DAX -0.14%, FTSE -0.55%, MICEX -0.62%
- Fair value: S&P -8.08, Nasdaq -9.24, Dow -86.65
- Total volume: 1.66mil ESZ and 8.8k SPZ traded
- Economic schedule: Chicago Fed National Activity Index, new home sales, William Dudley speaks, earnings from AutoZone (NYSE: AZO).