Right now the S&P is focused on Angela Merkel’s victory in the German elections, T+3, the September quarterly rebalance and the Washington budget battle. It’s possible “slow” may get a new meaning early this week.
The Asian markets closed mostly lower and 8 out of 12 European markets are trading modestly lower. This week’s economic calendar is filled with 25 economic reports, 10 Fed officials speaking and 9 T-bill, T-bond and T-note auctions or announcements.
Today’s economic calendar starts with the Chicago Fed activity index, PMI manufacturing index flash and some Fed speak out of Dennis Lockhart, William Dudley and Richard Fisher. We think it could end up a busy week as we head into T+3 and the September quarter end rebalance.
Effective today, three new Dow components
On Friday there were some changes made to the Dow (DJINDICES: DJI). It is called a “switch.” This is where they take out some stocks and add others. These changes are very important to the three firms being booted (Alcoa, Hewlett-Packard, and Bank of America) and to the way the public perceives them.
As we all know, the Dow 30 is a “broader market” index and when stocks are removed or sidelined it could have larger economic consequences. The purpose of switches is to maintain the correct weighting within the index, one that reflects the broad market.
Dow welcomes Goldman Sachs, VISA and Nike
This morning Goldman Sachs (NYSE: GS), VISA (NYSE: V) and Nike (NKE)will be added to the Dow, which will make financial stocks the most important sector in the Dow, pushing the sector past the industrial sector and giving financials nearly 35% of the weighting of the average. It is the first 3-for-3 stock switch since April 8, 2004.
The stocks being removed from the index are Bank of America (BOA), down 65% since it was added to the Dow in January 2008; Hewlett- Packard Co. (HPQ); and Alcoa (AA), which has underperformed the index and is down 6.9% on the year. All three stocks being added have outperformed the blue chips’ 15% gain: Goldman +25%, VISA +17.8% and Nike +26.6%.
Our call was to sell rallies last Thursday and Friday, and both days the S&P sold off. While we have seen a few 3-day losing streaks this year, they all came in the third quarter. According to the Ned Davis S&P cash study the first trading day after the September quad witch has been been up 9/ down 20 of the last 29 occasions. Including today, there are 6 trading days left in the quarter.
Look, it was clear that after the Fed no-taper and the pop up to 1725 that the ESZ was extended, and that was why we said sell rallies. But how long will the selloff last? According to the Trader’s Almanac, the week after the September triple witching has the Dow down 17 of the last 22 occasions with an average loss of -1.2% since 1990. The end of September is prone to weakness and end-of- quarter portfolio restructuring.
We will see one of our favorite market events, one little known to average investors, T+3, where the mutual funds get to mark up their winning stock positions and sell the losers. The sum total of these factors may not lead to a selloff, but it is unlikely to boost any rallies.
While we lean to still selling rallies, we also think we could see some type of pop either today or tomorrow. We also will be looking for signs of “back and filling” over the next few days.
As always, keep an eye on the 10-handle rule and use stops when trading futures and options.
In Asia, 9 of 11 markets closed lower: Shanghai Comp. +1.33%, Hang Seng -0.56% , Nikkei -0.16%.
In Europe, 8 out of 12 markets are trading modestly lower: DAX -0.04%, FTSE -0.28%.
Morning headline: S&P 500 Futures Seen Higher; Debt Ceiling in Focus
Total volume: 1.76mil ESZ and 3.9k SPZ traded
Economic calendar: Chicago Fed activity index, PMI manufacturing index flash, Fed’s Lockhart speaks.