While we have talked about Congress coming back to work on Sept. 9, the two-day Fed meeting and the September quadruple witching, we have not spoken about the quarterly rebalance that happens on the last trading day of September and the end of the third quarter. Investors rebalance their positions at the end of every quarter, taking profits in one sector and refocusing on assets that are lagging.
Below is a look at JP Morgan’s projected rebalancing:
[table caption=”JP Morgan Chase Quarterly Rebalancing (forecast)” width=”500″ colwidth=”20|100|50″ colalign=”left|left|center|left|right”]
Sector,Current Wgt,New Wgt,Chg,Buy ($M),Sell ($M),Net ($M)
C. Discretionary,12.27%,12.31%, 0.04%, 1549.8, 878.1, 671.7
C. Staples,10.15%,10.15%,0.00%, 714.1, 707.8, 6.3
Energy,10.75%,10.76%,0.01%, 772.5, 589.7, 182.7
Financials,16.39%,16.36%,-0.03%, 853.7, 1308.3, (454.5)
Health Care,12.90%,12.90%,0.00%, 1060.5, 1042.6, 18.0
I. Technology,18.08%,18.04%,-0.05%, 1881.1, 2658.7, (777.6)
Industrials,10.31%,10.29%,-0.02%, 559.9, 954.0, (394.1)
Materials,3.41%,3.46%,0.04%, 765.7, 68.3, 697.5
Telecom. Services,2.50%,2.49%,-0.01%, 54.8, 238.3, (183.5)
Utilities,3.23%,3.25%, 0.01%, 242.8, 9.1, 233.6
Total,100%,100%, , 8454.9, 8454.9, 0.0
You’ll see a lot of headlines about the quarterly rebalancing, but don’t be surprised if it sounds confusing. Many analysts don’t really understand it themselves. The rebalancing is actually two rebalancing agendas happening at the same time.
The indices rebalance to maintain their ability to reflect the overall value of the stock market as a whole. A representative sample, in other words. Investors, on the other hand, rebalance to increase their allocation of winners and reduce their exposure to badly performing stocks. Both groups put orders into the flow.
All this activity can increase volatility, cause large swings, and make things like the Friday Effect more pronounced. Add in the tendency of algos to extend price moves by running stops, and it can create some dizzying ups and downs that don’t seem to have a clear reason.
And then there’s Syria
As we’ve already seen, the tension in Syria creates nervousness in the markets. However, what that news will do is never a sure cause-and-effect question. Sometimes the markets just want to see strong leadership. President Obama has signaled that, international coalition or not, he is prepared to take action on Syria alone. That resolve may be enough to get traders to stop hedging their bets and start speculating again.
For today, however, imminent U.S. action is apparently on hold. This has stabilized the dollar and caused oil prices to drop. These are both bullish for stocks.
We should add that a lot of technical traders will say that the news, including possible action in Syria, is already priced in and that the market only appears to be reacting to the news. There’s some truth to that.
Traders cannot predict when the algorithms decide to go from running sell stops to running buy stops. We know it is going to happen but we don’t know the exact millisecond that the actual program flips.
What we do know is there are several different types of algorithmic programs. Some put in thousand of bids and offers that never get hit, some are headline news algorithmic programs that are hooked up to all the major news outlets and some are tied to picking the ranges of a particular economic releases. It’s not an easy game to play, but you can win if you can keep up, and part of that process is keeping your playbook updated.
Just knowing that there is more going on under the surface than meets the eye (or the headines) is often enough to keep traders from jumping into a move blindly. It’s a good time to pick your opportunities carefully and avoid chasing the market.
Also, don’t forget about the Friday effect. which may kick in late in the day. We’ll be watching the MIM closely for clues about whether there will be a selloff or surge before the closing bell. If you go long, prepare not to be long for very long. You’ll win today by having a good exit strategy at all times.
The Asian markets closed mostly higher while Europe is trading mostly lower. It’s going to be a long trading day. With the exception of a few economic reports and some Fed speak, we think things will go pretty quickly this morning. With the British signaling they will not take part in any attack on Syria, it has left the French and the U.S. to decide what steps to take next. It has also left the U.S. in a bad position not having its No. 1 partner backing it up.
Our view is the thinner it gets the more likely the markets will drift higher. Add to that the bullish effect of the delay in a U.S. attack and the drop in oil prices, and those who are in the market will tend to buy. Yesterday the ESU ran the buy stops above 1639 up to 1644. There are more stops to run above that level. While we do not believe the sell-off is over, we lean to buying weakness today.
As always, keep an eye on the 10-handle rule and please use stops when trading futures.
In Asia, 9 of 11 markets closed higher: Shanghai Comp. +1.15 (0.06%), Hang Seng +26.59 (0.12%), Nikkei -70.85 (0.53%).
In Europe out 11 of 12 markets are trading lower: DAX -41.00 (0.50%), FTSE -27.55 (0.42%)
Morning headline: Dollar firm as Syria action on hold, oil eases (Reuters)
Total volume: 1.74mil ESU and 9.7k SPU (mostly ETFs) traded
Economic calendar: Personal income and outlays, James Bullard speaks, Chicago PMI, Consumer Sentiment and Farm prices.