According to Wikipedia, an Indian Summer is a period of unseasonably warm, dry weather, occurring after the end of summer proper. While the temperature has been “unseasonably” warm here in Chicago the stock market has been unseasonably cold.
Not As Bad As It looks
The S&P has been going down for the last 3 months. After making its peak back on Aug. 2, the S&P 500 futures have sold off 4.5%- at the same time gold has risen significantly. While the selling in the stock market has been broad based, investors do not seem to mind “dumping” out of some of their riskier bets. According to Bespoke Investment’s Justin Walters, when he broke up the S&P 500 into 10 groups of 50 stocks he found that that the 50 stocks with the richest price/earnings valuations had declined just 3.4%, the least among the 10 deciles. The 50 stocks paying no dividend lost just 3.9%, versus 4.9% for the 50 proffering the most generous yields. Heavily shorted stocks outperformed. “This is the type of relative performance you would see during a market rally, and not a market decline.”
The public seems to be doing most of the selling. The 50 most heavily held by institutions fell just 3.5% vs, 4.9% for the 50 with the least institutional ownership. The 50 stocks with the most foreign revenue fell -3.2% vs. -52% for those with the most U.S. sales. Sensitive sectors continue to hold up. More than half of all industrials, materials and technology stocks hovered above their 50-day averages—a feat managed by less than 15% in the utilities and consumer-staples camps.
Everyone has their own reason for selling but the most recent one is Syria. As the big global derivatives books make their adjustment, oil has become front and center again. But why? Syria is not an international oil hub. The main concern has been that if a war did breakout that oil production could be slowed or halted but Syria does not own any transport routers or oil hubs. Additionally, allies like Saudi Arabia could offset any disruption from Iran or Syria.
NO 10% CORRECTIONS
With the stocks up over 150% from their Oct 2009 low and up over 55% in two years with no 10% correction, investors are nervous. The upcoming budget battle, the feds taper, this week’s jobs number, the housing market, the Sept. quadruple witching and the 3rd quarter rebalance that occurs at the end of the month are just a few of the concerns investors have as we move into the new month. The other part of this is the “great unwind” between bonds and stocks and what the ramification will be once the central banks stop supplying liquidity. Since 2000, $980 billion has poured into bond funds and $388bil pulled from stocks. Based on that, its hard to say that the industry as a whole is over weighted in stocks.
There is a long list of potential headwind for stocks as we head into September. The big question is are stocks going to crash? According to the stats above, it doesn’t look that way right now but we all know how fast that can change. The truth of the matter is that global stock holdings are way lower that they were in 2007 and there is still billions waiting to get back into the market. We said stocks would eventually live with higher rates and we still think that way. Can the stock market do a big nose dive? Sure it can, but its the fed’s QE isn’t there to save the day the PPT will be. Can stocks continue to sell off now? We suspect so, but we still think there will be a big year end rally.
Today Murphy’s law is starting everyone in the face. In the world of futures and options trading; what can go wrong will go wrong. Its how the game is played.
True story. I have a friend from the UK that is finishing off his tour in Afghanistan. He hit me up on the Facebook chat Friday to tell me he was “long” oil waiting for the bombs to start dropping on Syria. He told me that the camp he is in bet 80% -20% that the U.S. would strike Syria over the weekend and he told me the exact time they were told it would happen. This morning the S&P is up 16 handles and crude is down .85 cents.
In my mind the Obama administration did the right thing by not attacking Syria. The U.S. has made too many snap decisions in the Middle East already and plowing into another one without a plan is not good for anyone. See you tomorrow on the 8:30 open…
As always, keep an eye on the 10-handle rule and please use stops when trading futures.
Featured Video: Marty the PitBull Schwartz speaking at Amherst College.
In Asia, 8 out of 11 markets closed higher (Hang Seng +2.04%, Shanghai Comp. unchanged , Nikkei +1.37%).
In Europe out 11 of 12 markets are sharply higher (DAX +1.87%, FTSE +0.68%)
Morning headline: Obama Backs Down; World Markets UP Sharply
Total volume: 1.93mil ESU and 23k SPU (mostly ETFs) traded
Economic calendar: MONDAY: Labor Day—U.S. markets closed :TUESDAY: PMI manufacturing index, ISM mfg index, construction spending, Fed’s Williams speaks
Danny Riley is a 34-year veteran of the trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985.
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DISCLAIMER: The information and data in the above report were obtained from sources considered reliable. Opinions, market data, and recommendations are subject to change at any time. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any commodities or securities.