Panic On The Street: Is The Mood Of Investors Shifting?

Friday September 9 2016, stood out in the market. For the first time since July 8,  S&P 500 closed more than 1% from previous day’s close – it shed 2.4%. The selling was continuous and high-volume. The volume for Dow Jones Industrial Average was 53% higher and for SPY, Select Sector SPDR, the volume was 199% higher. It was panic selling and was broad. Every thing was sold. Whether this was warranted or not we will find out in the next few days. However, we had mentioned before that September has history of being a down month and that it might live up to its reputation this time too.

Monetary Policy and Fundamentals Are Fueling Nervousness

Recently the speculation has increased that the Federal Reserve will raise its Fed-Funds rate soon. Fed-watchers have been reading tea-leaves and their soothsaying is inflaming the nervousness. The chatter has also changed for the Bank of England regarding its policies and a new fear emerging that it may raise rates too. Then on Thursday, ECB’s press conference gave the impression that it may be getting close to exhausting its ammunition.

These central bank developments did not sit well with investors, who were already nervous mostly because of the all-time high levels, due to softening of economic data and earning news and because of the PE multiples that, though not very high, are not cheap.

Technicals Might Have Done It

Market was trading in a narrow range for many days. Major U.S. indices broke out of a two-year long trading range in July. S&P 500 broke above over 2130s, the 2015 high point, but did not gain any momentum. Then it traded within another narrow range bounded by 2193 at the top and lows near 2150. Other indices had similar pattern. This started to look like topping pattern. Also, since S&P 500 traded within this range with quite consistency, investors had aggregated stops above and below the trading range. The ECB press conference turned out to be the catalyst that pushed the bears to get the upper hand and they ran through stops to the downside.

Bond Yields Rose But Are Still Low

Bond yields rose sharply around the globe but they are still very low by historical standards. The rising yields are nevertheless making investors nervous about inflation and whether the central banks around the world will have enough fire-power to do something in time.


30-Year German Govt. Bond Yields


30-Year Japan Govt. Bond Yield


30-Year UK Govt. Bond Yields


30-Year U.S. Govt. Bond Yield

Relative Strength

S&P 500 SectorsIn the last six months SPY, Select Sector SPDR, gained +8.08%. Four of S&P 500 component sectors underperformed SPY and five outperformed it.

Energy (XLE) out-gained the index by 8.25%, Financials (XLF) by 2.68%, Materials (XLB) and Technology (XLK) by 2.23% and Industrials (XLI) by +0.13%.

On the down side Consumer Discretionary (XLY) underperformed S&P 500 by -4.01%, Consumer Staples (XLP) by -6.13%, Utilities by -5.66% and Health Care by -0.92%.

However their current chart patterns are telling slightly different story.

Sectors Showing Strength

XLE / SPY Ratio 11-Sep-16XLF / SPY Ratio 11-Sep-16

XLK / SPY Ratio 11-Sep-16
XLE made a double bottom in August and by mid-month broke above the intermediate high. It has been on a uptrend since April but started to outperform SPY in August. It briefly declined against the broader ETF in late August but has again taken the leadership. The current trend looks to continue. It lost 3.0% compared to 2.4% for SPY on Friday.

XLF has been outperforming SPY since July. On Friday it declined -1.9% – less than SPY. XLK declined more than SPY on Friday but its ratio with SPY still hints that it is poised to do better than the index.

Sectors Doing Badly

XLY / SPY Ratio 11-Sep-16 XLP / SPY Ratio 11-Sep-16 XLI / SPY Ratio 11-Sep-16 XLB / SPY Ratio 11-Sep-16

Consumer Discretionary (XLY) and Staples (XLP) have been under performing the SPY for the better part of this year. There is no indication that this trend is either under attack or is about to change.

Industrials (XLI) and Materials were doing better for some period, however, they seem to have taken a bad turn at the end of August and look set to underperform SPY in the near future.

Sectors That May Be Turning Around

XLV / SPY Ratio 11-Sep-16 XLU / SPY Ratio 11-Sep-16

Health Care (XLV) is a defensive sector and it was underperformed the broader ETF in August but looks set to reverse that trend beginning September. It declined -2.0%, less than SPY.

Utilities (XLU), were trailing SPY since July. That trend had a turnaround at the end of August. But on Friday, XLU lost -3.8% – more than any other sector. So, the trend change has a question mark

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