The Asian markets closed higher across the board (Nikkei +2.57%) and Europe is going along for the ride. I am sure you and everyone else are tired of hearing how slow it is or that people are taking time off. What we should be talking about is the congressional time clock and the end of the Fed’s quantitative easing programs.
We all know the money the government has been spending to support the markets can’t go on forever and we all know it needs to be paid back, but that’s not going to happen any time soon. It’s not if, it’s when. And it’s not going to be pretty. That said, I do not believe that there will be an ’87-style crash.
When the credit crisis started, I said this would be a 10-year deal, and now I think it could go on for even longer. One of the things the PitBull has taught me is that the S&P tends to top at the end of July and into August. With the S&P up so much and with so much talk about an impending selloff, we think you have to keep tight stops on your longs.
Until then we are still buying weakness. Sure we had another 3-day sell-off in the S&P, but look at the net changes below. Until yesterday the S&P had been down 4 out of the last 5 sessions, down almost 30 handles.
Monday Aug 5 -1.5 handles
Tuesday Aug 6 -8.6 handles
Wednesday Aug -5.7 handles
Thursday Aug 8 +5.5 handles
Friday Aug 9 -7.5 handles
Monday Aug 12 +0.90 handles
The problem is, the S&P isn’t really going anywhere and the price action looks exactly as it did a few weeks back when the ESU sold off from the 1698 high down to 1670. That was about a 30-handle sell-off as well. After the sell-off there were several higher lows, a bunch of back-and-filling, and then a push back up to the new contract high at 1705.00. That’s what we think is going on now.
The big thing going forward is timing. Congress goes back in session in the 2nd week of Sept and the following week is the September quadruple witching with a two-day Fed meeting in the middle of it.
The session resumes Sept. 9 for both House and Senate. That is 9 legislative days before the end of the fiscal year and before the current spending authority expires. Without action (like a month-long emergency extension) we face another shutdown on Oct. 1.
While the stats vary for the week of the Sept Quad, it also has a nasty reputation: Dow down 1370 points or 14.3% in 2001, the second worst weekly loss ever and the 5th worst week over all (Thank you Stock Trader’s Almanac) but the Friday Quad Witch has been up 8 in a row and up 9 of the last 10.
Going into the fiscal year end, tax selling starts to show up The big firms unload their losers to prepare for year-end statements. And then in comes the October Jinx; since 1964 there have been 17 declines of over 10%, and 10 of them (1966, 1974, 1978,1979,1987, 1990, 2000, 2002 and 2008) caused a lot of damage in October. Just when I got you going the one way I have to bring you back the other way; October is also known as the “Bear Killer,” with several major lows made in the month.
Our view for the day is, we have stops building up on the upside and in this type of “thin to win” environment it would not be hard to push the S&P up. Based on the firm close and barring any negative new event, we see higher prices. We think it’s time to start considering the potential for a fall sell-off. You take it from there.
As always, keep an eye on the 10-handle rule and please use stops when trading futures and options.