Our View
Despite the ES still being up almost 11% from its June low, it’s also down 15% for the year. According to FactSet, net short positions against the ESU (September contract) and ESZ22 (December contract) have skyrocketed over the last few months, reaching levels not seen in two years.
Down in the first part of the year, the market enjoyed a low-volume summer rally. Remember what we have been looking for: A nice summer rally and then a return to the selloff in the second half of Q3 and early Q4, followed by a strong year-end rally.
Now we look for the ES to sell off in the ‘spooky months’ of September and October — but we also warned about the last two weeks of August too. This week is both the end of August and the beginning of September.
According to the Stock Trader’s Almanac, today historically shows the S&P stats being up 18 times in a row now. For Tuesday, it has the S&P down 17 of the last 25 years. For the last trading day of August, it has the S&P up 13 of the last 21 occasions (~62%) and for the first day of September, it has the S&P up 14 of the last 26 (~54%), with the Dow down 9 of the last 13 years.
Look, I think we know what we are heading into.
According to the Stock Trader’s Almanac, September is the start of the business year and back to school has made September the leading barometer month over the last 60 years. Portfolio managers who are back to work after Labor Day tend to “clean house.”
The markets are going to come into the session under pressure on Monday. Let’s dive deeper.
Our Lean
The ES is down 200 points from Friday’s high and is coming off two consecutive weekly losses. Best Buy and HP report earnings this week and on the economic front, consumer confidence, ISM manufacturing PMI and Friday’s job report will dominate the headlines.
Our Lean:
Based on Friday’s close, it’s my guess we see lower prices. If the ES breaks 4000, I’m looking for 4068. A break and a close below that level points to much lower prices, although the ES is very stretched out after a rapid decline. While Friday was straight down, today could very well see a bounce.
As far as the upside, the 50% retracement from the Globex low to Friday’s high is 4112. I doubt it will get there, but if the ES opens sharply lower, I may buy the open and sell any 40 to 70 point rallies. There’s also a gap-fill to Friday’s low at 4042.75 — although the ES came close to filling it during Globex. So keep that in mind if we rally shortly after the open.
Lastly, am I surprised at the sell-off? Not at all, there is a lot more pain coming now that the summer rally looks to be complete.
Daily Recap
The ES traded down to 4180 early Friday morning and rallied up to 4217.25 at 9:00 and opened the regular session at 4201.75. It mostly chopped around until Powell’s speech at 10:00, plunged 60 points down to 4157, then ripped higher by almost 50 points up to the regular session high of 4206.25.
For the next 20 minutes, the ES hung around the vwap at the 4191 level up until 10:21 and then puked 80 points down to ~4126. From there, each 13 to 18 point rally was sold, as the ES continued to make new lows. After a 13.25 point rally off the 4100 area around 12:30, the ES bled lower for several hours into the close, dropping 54 points and going out at the low of the day. It even continued lower after the 4:00 close.
The 3:50 cash imbalance showed $1.7 billion to sell, as the ES traded down to 4055 and traded 4059 on the 4:00 cash close. After 4:00, the ES sold off down to new lows at 4042.75 and settled there on the 5:00 futures close, down 141.50 points or -3.37% on the day.
In the end, I hit it on the head with the 4319 50% retracement sale and I was right about selling the early rallies. However, I was wrong about DeMark and the Fed. I had a strong feeling there was downside potential. I made a few good 10 and 30-point scalps on the long side, but I didn’t jump on the short and I think this goes back to one thing: I was unable to sell the weakness and it went down all day.
In terms of the ES’s overall tone, it was deplorably weak. In terms of the ES’s overall trade, volume was decent at 2.14 million contracts traded — it’s first session with more than 2 million contracts traded since July 28.
- Daily Range: 174.50 points
- H: 4217.25
- L: 4042.75
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