S&P 500 Says Hello To September

On Yesterday’s cash open the S&P futures opened at 1973.50, down about 13 handles from Friday’s close, and up 14 handles from Sunday’s overnight low. The futures began to sell back down toward the overnight, low but caught an early bid just after 9:00 CST, as the index bounced over 20 handles back near Friday’s close, and eventually drifting lower into the afternoon to close the cash sessions range inside the globex range.

Going into yesterday, the last trading day of the month had closed lower eight of the last nine occasions, and I warned people yesterday that the end of month rebalance was not going to be pretty, and that the markets should experience weakness. The MiM started showing large to buy early on, and by the time market-on-close (MOC) was released publicly, it was over $1.2 billion on the buy side. However, the futures were not able to catch and sustain a real bid as attempted rallies failed late in the day, and the MiM showed that once the official MOC was released buyers pulled the plug on their bids as the MiM went negative from being up as much as 1.8 billion. Bank of America Merrill Lynch’s Hedge Fund Monitor reported that funds had shorted Nasdaq at levels not seen since 2007, this has been consistent this year as money has flowed to the sidelines or short side. Yesterday’s rebalance, even while funds have become heavily balanced to the short side over the course of this year, and especially in the last two weeks, did nothing noticeable to square books up less bearish.

Goodbye August

August was a tough month. Going into the beginning of August, we noted it was the worst performing month in the equity markets over the last 20 years, and it did not disappoint, closing as the 8th worse August on record. The month opened and chopped, was unable to go positive even 10 handles at any point, and was unable to match the highs of the final trading day of July. For bulls there was nothing good about August. For the bears, who had been calling for a 10% correction since the futures were below 1500.00, they seemed to feel their vindication last week as market went into correction territory for the first time since August 2011.

S&P 500 FUTURES TAKE A BEATING BUT KEEP TICKING

The S&P has taken a beating since last week. You can see that as the volume picked up, so did the level of MOC selling. One of the things we have constantly written about is how the MOC buying switched to selling on the last trading days of the March or the last trading day of the first quarter.

Will September Be Kind?

Yesterday, Morgan Stanley adjusted its outlook of the S&P 500 cutting its forecast and slashing it’s target from 2275 to 2200. Since 1950, September has been the weakest month of the year for the S&P 500, and the only clear losing month on the historical calendar. The stats for the week, pre-Labor, are not kind either with six of the last eight closing lower, however, the first five days of September have generally been stronger. Also, the last two years have posted highs mid month before selling off the second half of the month into October.

I don’t think the overall selling is done, but I also know that this market has to trade in both directions, and once the bus gets too full to one side, the algo’s grow hungry and race toward stops in the other directions. August/September has only closed in the same direction 10 of the last 19 years, and the last nine times August closed lower, five times September closed higher. While I think any upside will be limited at this point, we could see a higher September and then a lower October. I also believe that there is a correlation that exist between the current correction and the most recent one of 2011, as noted in the featured chart this morning. In 2011 there was a bounce from the August lows, only for upside to be limited, and lows to be retested two months later.

September Opens With A Bang

I have been noting the 1950.00 & 2000.00 levels as magnets, and yesterday said below 1950 were sell stops. Last night the futures opened mostly unchanged and drifted slightly lower until the Chinese PMI number was released and worldwide markets began to tank. The ESU15 was down nearly 35 handles early in the Asian session, and bounced 10 handles and chopped before the Euro open, then proceeded to sell off 20 handles shortly after the European session was underway. The futures did bounce 15 handles this morning, but are now starting to travel lower nearly 10 handles trading at 1926.00

In Asia, 11 out of of 11 markets closed lower (Nikkei. -3.82%), and in Europe 12 out 12 of markets are trading lower (DAX -2.63%). Today’s economic calendar includes: Motor Vehicle Sales Redbook 8:55 AM ET, PMI Manufacturing Index 9:45 AM ET ISM Mfg Index 10:00 AM ET Construction Spending 10:00 AM ET 4-Week Bill Auction 11:30 AM ET Gallup US ECI 1:00 PM ET Eric Rosengren Speaks 1:10 PM ET and earnings from Bob Evans Farms Inc (BOBE) & Dollar Tree Inc (DLTR)

Our View: The ESU15 tried to rally when the MiM showed large to buy. Despite the 1.8 billion to buy, the futures reversed back down going into the 3:00 cash close. This was followed by a sharp drop in globex. I have been saying to sell the rallies, and I still think that is the case. The ESU15 is back below the key level of 1950, and at this point there is nothing to rule out a revisit of last weeks lows. Don’t hesitate to take a profit, keep stops tight, and remember that even with extreme moves up or down, there are violent reversals. Don’t fall in love with your positions.

And always remember to use stops when trading futures and options…

In Asia 11 out of 11 markets closed closed : Shanghai Comp. -1.23%, Hang Seng -2.24%, Nikkei -3.84%
• In Europe 12 out of 12 markets are trading lower (6:30 am CT) : %, DAX -2.86%, FTSE -2.61% at 6:00 am CT
• Fair Value: S&P -2.36, NASDAQ -1.44, Dow -15.96
• Total Volume: 1.8 mil ESU and 2.7k SPU traded
• Motor Vehicle Sales Redbook 8:55 AM ET, PMI Manufacturing Index 9:45 AM ET ISM Mfg Index 10:00 AM ET Construction Spending 10:00 AM ET 4-Week Bill Auction 11:30 AM ET Gallup US ECI 1:00 PM ET Eric Rosengren Speaks 1:10 PM ET and earnings from Bob Evans Farms Inc (BOBE) & Dollar Tree Inc (DLTR.

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