A Massive Quarter-End Rebalance Is Looming
It’s one of the top 20 largest “sell” estimates since 2000.
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Our View
The end of the second quarter is going to see billions of dollars of stocks, bonds, equity options, index futures and options trade hands. The traditional rebalancing involves trading the gains of well-performing assets (selling high), for more low-performing assets (buying low), at the end of each quarter.
Theoretically, this serves to protect a portfolio from being too exposed or straying too far from its original strategy, but in today’s high-flying quarter-end, there will be a lot more tied to more extensive strategies at work.
In fact, I was with a guy that used to work at Raj’s prop desk at BofA and he said “everything we have been seeing is a giant program that does all the buying and selling. Little if any is done by humans.”
Goldman’s Gillian Hood, who calculates that heading into month- and quarter-end, the bank’s trading desk model estimates a net of $26 billion of US equities to sell from US pensions given the moves in equities and bonds over the month. This, as Hood puts it, “is expected to be a significant rebalancing event”, or said otherwise, we are facing a huge pension dump in the coming days just as liquidity shrivels post last Friday’s Russell rebalance.
Goldman’s quick stats on the rebalance suggest that it is truly an outlier: This rebalance estimate is one of the top 20 largest SELL estimates in our entire data set going back to Jan 2000 (19th largest).
Our Lean
We never got down to my support level at 4335 — or 4350 for that matter — but if you are able to pivot during the trading session, you can adjust and still catch a nice move. This is a snippet from the MTS Chat Room:
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IMPRO: Dboy :(9:36:01 AM) : stops and small buy programs
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IMPRO: Dboy :(9:36:22 AM) : Turn Around Tuesday
I understand this is not saying “buy it now,” but I did see some big shifts going on.
One was that the YM was not going up as much as the NQ and ES. The other part of this is I really had a feeling that the index markets were oversold and that if the ES could get back above 4390, it was more than likely would take out the stops above 4404, which it did.
But that was yesterday and today is a new day.
The Stock Trader’s Almanac says Friday should be weak and according to the rebalance numbers, they are to the sell side. Was yesterday’s rally a setup for another let down?
If the ES gaps higher and were trading above 4420 on the open, I would have to sell it. However, right now it doesn’t look that way. If the ES is lower on the open, I would look to be a buyer on the initial dip.
If there is one thing I know for sure, it’s that there is going to be a high level of rotations. Yesterday it was “buy the NQ, sell the RTY and YM” and “buy ES and sell RTY and YM.” Maybe we will see the opposite today.
I want to do a webinar for just the people that read the OP. Just me and some charts and talk about how I see the next six months. We all know index markets have rallied, but was it a dead-cat bounce or another selloff that leads to another higher high.
MiM and Daily Recap
The ES traded down to 4268.50 on Globex and opened Tuesday’s regular session at 4379.50. After the open, the ES traded 4377.75, rallied up to 4389, sold off down to 4374.50 at 10:13, rallied up to 4390.50 at 11:03 and pulled back to 4381.00 at 11:11. It was that low that set up the next leg up that pushed the ES up to 4424.75 at 2:34.
I know this is a lite recap, but there were almost no pullbacks — look at the chart above! — it was pretty much straight up. The ES traded 4423 as the 3:50 cash imbalance showed $153 million to sell, but the Nasdaq imbalance was $1 billion to sell. The ES sold off down to 4417.50 at 3:58 and traded 4418 on the 4:00 cash close. After 4:00, the ES sold off down to 4413.25 and traded 4414.75 on the 5:00 futures close, up 48.50 points or +1.1% on the day.
In the end, all I have to say is the S&P goes down for days and weeks but it only takes one day to bring it back up. In terms of the ES’s overall tone, it was all buy programs and buy stops. In terms of the ES’s overall trade, volume was on the high side for an up day at 1.43 million contracts traded.
Technical Edge
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NYSE Breadth: 79% Upside Volume
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Advance/Decline: 74% Advance
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VIX: ~$13.75
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Traded a recent low of $12.73. That’s the lowest it’s traded since pre-pandemic in early 2020 (i.e. with stocks at ATHs)
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Let’s see how the market absorbs the news about Nvidia and AMD (and other AI chip stocks) as the Biden Administration weighs AI chip sales to China. The news is weighing on the group, which by itself isn’t a big deal.
However, NVDA & Co. have been a major catalyst for the market. So if these names start to unravel a bit — and keep in mind, Market Caps Matter and Nvidia is sitting at the $1 trillion mark — we could see further weakness this week.
Also keep yesterday’s MSFT and TSLA setups in mind.
S&P 500 — ES
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Pivot: 4400
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Upside Levels: 4420-4430, 4445-4450, 4467-70
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Downside levels: ~4370, 4345-50
SPY
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Upside Levels: $434 to $435, $437 to $437.50
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Downside Levels: ~$431 (y’day low), $429 to $430
SPX
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Upside Levels: ~4380, 4400-4407, 4423-25
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Downside Levels: 4328-35, 4300
NQ
Tested down to 14,853.50 and closed just 3 points off that level, then bounced ~250 handles.
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Upside Levels: 15,125-150, 15,225-250, 15,350
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Downside Levels: 15,000, 14,920, ~14,830-850
QQQ
“QQQ needs buyers to step in — now.” and they did!
Now let’s see if the QQQ can clear ~$365, which has been short-term resistance. Above $367 and the Qs can push $370+
On the downside, keep an eye on $361.50. Below $360 and the $357.50 will be back in play as a key area.
Guest Post
Topic: Taylor 3 Day Cycle
Author: David D Dube’ (a.k.a. PTGDavid)
Prior Session was Cycle Day 3 (CD3): Markets held critical Line-In-Sand Level (4375) as outlined in prior DTS Briefing 6.27.23. Once price cleared 4390 handle, then an aggressive rally unfolded, pushing up 2SD, exceeding 10 day average true range, fulfilling CD3 Penetration Targets, and securing a Positive 3 Day Cycle. Prior range was 53 handles on 1.433M contracts exchanged.
…Transition from Cycle Day 3 to Cycle Day 1
This leads us into Cycle Day 1 (CD1): Bulls have the “momentum-ball” and it will be theirs to lose. Average Decline for a “normal” CD1 measures 4381. We’ll be monitoring today whether the bulls can maintain ball control or if yesterday’s rally was a better selling opportunity. Higher low stabilization trade would be warranted to confirm the recent rally. As such, scenarios to consider for today’s trading.
Bull Scenario: Price sustains a bid above 4405, initially targets 4415 – 4420 zone.
Bear Scenario: Price sustains an offer below 4405, initially targets 4395 – 4390 zone.
PVA High Edge = 4414 PVA Low Edge = 4385 Prior POC = 4419
*****The 3 Day Cycle has a 91% probability of fulfilling Positive Cycle Statistics covering 12 years of recorded tracking history.
For more detailed information for both bullish and bearish projected targets, please visit: PTG 3 Day Cycle and/or reference the Cycle Spreadsheet below:
Link to access full Cycle Spreadsheet > > Cycle Day 1 (CD1)
Thanks for reading,
PTGDavid
Open Positions
Bold are the trades with recent updates.
Italics show means the trade is closed.
Any positions that get down to ¼ or less (AKA runners) are removed from the list below and left up to you to manage. My only suggestion would be break-even (B/E) or better stops.
** = previously mentioned trade setup we are stalking.
Down to Runners in GE, CAH, LLY, ABBV, AAPL, MCD & BRK.B. Now Add META, AVGO, UBER, CRM, AMZN and CVS.
4 longs, 2 shorts.
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PYPL — short from about $68 — trimmed at $67 and $66. Should be done to about ½ position with a break-even stop. $64 to $65 is the next trim spot.
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Not exactly how I drew it up in regards to “reward” but profit is profit in this case.
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WMT — long from $154 — Trimmed ⅓ trim at $156 to $156.50,
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Trim more down to half at $156.35+, ideally $157+. Break-even stop
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FSLR — short from $189 — trimmed ⅓ or more (about 40%) at the $183.50 gap fill, traded sub-$177, so another trim down to roughly ⅓
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Can keep a break-even stop, but down to runners into yesterday’s low made sense, as we did note we were looking to “save some” of the position in the event of a potential “puke” down to ~$175.
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Got pretty close. Exit the rest or get down to runners if we retest Monday’s low.
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INTC — Long from $33.75-ish, added some at $32.10. We never add, but as mentioned on Friday, “In hindsight, ~$32 was a better buy spot than $33.50-$34.”
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Got another excellent opportunity to trim INTC yesterday above our Cost Basis as it traded as high as $34.23 (that’s above even our initial entry). “Trim Note” below:
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I would trim down to ½ at or above our cost basis. I am really a big proponent of managing risk and I don’t care what it does to “skew” our numbers/results. Why trim? Because the position was larger due to the add and because our AMD position triggered on Friday.
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Stop at $31.75 hard. Can trim/exit on a push back to $34 and consider it a “kick save” on the position. Those who stick with it, $34.50 to $35 is the next profit target.
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AMD — long from ~$109, the gap-fill and 10-week ema. $107 stop. Ideal target is $115 to $116, but feel free to trim ¼ or so beforehand.
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Careful off the open. Either $107 hard stop with last night’s chip news or give AMD the opening hour to see how it holds up. 50-day is not far off now.
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DOCN — ½ position* at $38.25 — Tight stop would be ~$37. Loose stop would be ~$36. Ideally we want to at least see the gap-fill near $41, but $39.75-$40+ is acceptable for ¼ trim.
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Oh so close to our first trim area. Let’s see how it responds today.
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Go-To Watchlist
Feel free to build your own trades off these relative strength leaders
Relative strength leaders → (List is growing long!)
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Growth stocks ARKK — DOCN, SOFI, UPST, SHOP
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LLY, CAH
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AI stocks — NVDA, AMD, AVGO, ADBE, SMCI
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Mega cap tech — MSFT, AAPL, META, CRM
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Select retail — CMG, ELF, LULU
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Homebuilders ITB — TOL, KBH, DHI
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BRK.B
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ABEV, DXCM (nice breakouts)
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Cruise stocks — RCL, CCL, NCLH
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DAL, DT, AMAT
Relative weakness leaders →
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PYPL
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MET
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CF, MOS
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PFE
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EL, FL, DG
Economic Calendar
Powell at 9:30 a.m. ET
Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.
Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!
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