Keep Calm – September Gyrations Will Pass

“I have a very strong belief that everything that comes into your life is supposed to and every condition of your life is part of the perfection of it and there is a blessing in all of it and that there are no accidents. It is perfect, absolutely totally perfect universe.” — Dr. Wayne W. Dyer

The above quote from Dr. Dyer in the audio program accompanying his best-selling book, You’ll See It When You Believe it, sums up security markets too.

You may or may not believe that markets are perfect but that will not change the reality. Your dis-belief in market’s action contrary to your understanding or prognostications will do naught to its past or future direction. The only thing that you can do is learn from its action to update your understanding because all future actions of the market are predicated on its past actions. The future price actions are relative to present actions, which, in turn, are relative to past. Markets go up if they believe that future economic performance will be better than current one. They go down if they believe otherwise. Everything happens from a relative level.

You have to believe that everything that happens in market is supposed to, to take advantage from it. You cannot profit in the markets by fighting it because it is the ultimate arbiter of price. Sooner you accept that whatever it did was for a reason, sooner you will be able to determine your future course of action. One has to consider the increased volatility in the market from than context.

September Calls for Caution

September has been historically a weak month for the equity indices and this year is no exception, so far. After 43 days of closing within 1.00% range from prior session’s close, S&P 500 witnessed four days of above 1.00% daily change in the last six days. This naturally increased the anxiety as demonstrated by the fear gauge, $VIX, S&P Volatility Index.

On Thursday September 8, $VIX closed at 12.51, Then on Friday market threw a fit and it advance by 40% to close at 17.50 and S&P 500 lost 2.5%. On Monday, we noted that after such a big decline big-cap U.S. indices do well in the next 5-day period. This time too they have not disappointed.

Major U.S indices have not yet gained pre-decline levels, but they are up over the 5-day period. S&P 500 gained +0.5% from September 9 close. Dow Jones Industrial Average gained +0.2%, NASDAQ Composite was up by +2.3% and Russell 2000 was up by +0.5%. Only Dow Transportation Average lost -0.7%.

$VIX, on the other hand dropped by -12.2%, though on September 12, it made a high of 20.51, 17.2% above September 9 close of 17.50. On week’s last trading day, $VIS declined by -5.7% and S&P 500 declined too. This means that even though S&P 500 decline, it did not increase market’s anxiety. Since January 2010, this has happened 150 times or on 8.9% of trading days. During this time, S&P 500 has been up over the next 5-day period 61% of times with average gain of 1.3%. So the odds are good that S&P 500 will be up by the end of next week.

However, just to throw a spanner in the works, there is an almanac event, which says that odds are for a decline next week. According to Stock Traders Almanac, the week after the September options expiry, which is next week, is bearish for markets. S&P 500 declined 22 out of past 26  years declined during the week after expiry with average loss coming at -1.08%.

An Apple A day Keeps The Doctor Away

Dow Jones Industrial Average and S&P 500 broke below a narrow rectangle trading box on September 9. Last weeks they regained part of that loss but are still below the lower-bound of the box, which is acting as a resistance. However, NASDAQ Composite is back in the middle of the range. One worrying sign is that 14-day RSI hasn’t recovered well so far. Russell 2000 is broken below an up-trending channel and has not recaptured it.

The saving grace for the U.S. markets was Apple, Inc. It had a stellar week and gained +11.4%. Since it is the largest public company, it greatly cushioned the downside market risk.

Bonds Are Increasing Anxiety

The odds for a Fed-Fund rate hike in September have decreased to 12% from 21% at the start of the month, but the yields on treasuries have increased. This is causing some concern. But as the 10-year Treasury chart shows, the yields are rising from all time lows and the trend is still down though. Similarly, the spread between 2-year and 10-year is increasing, it is still not at the level seen at the beginning of the year. From this we can deduce that, though the odds are high for yields to rise in the short-term, it is by no means the reversal of the trend.

10-Year Treasury Yields - 16-Sep-16

Dollar Index

Since January 2015, the U.S. Dollar index is in a rectangle trading range. In early-May it reached the lower bound of the range but since then has returned to the middle. For the past 6-7 weeks, it is trading within a narrower range. It is not flashing a sign for Fed hiking the rated in September.

This, however, does not bode well for Japanese yen and Abenomics, which needs a weaker yen for higher inflation. Bank of Japan’s meeting is just hours before FOMC’s meeting on September 21. Whether it will surprise the market or not remains to be seen but it doesn’t have very many options. Nevertheless, the twin central bank meetings later in the week are going to keep the market on the tenterhooks.

Commodities Are Tense

Commodities are generally having a rough time. In June, the Goldman Sachs Commodities index retreated from the resistance level formed by October 2015 high. It is forming an inverse head and shoulder pattern. If the pattern break to the upside – above 2016 high of 392.24 – then it will be bullish for commodities.

WTI Crude Oil is also forming a similar looking inverse head and shoulder pattern. A break above 51.67 will be quite bullish for it. A break below 39.19 may take it to test the lows of 26.05 reached in February.

In June, gold broke above an eighteen-month high resistance level. Since then it has come back to test that broke resistance. Since December 2015, it is in a uptrend, which is not yet broken, though a reaction is under way. A break above 1360 will resume the uptrend and a break below 1300 may take it to test May lows of near 1200 level.

Copper is making a symmetrical triangle at multi-year lows. A break above 2.27 may take it 10-15% higher. A break below 2.06 may take it seven-year low reached in January.

Many soft commodities are also not doing better. Corn has broken below two-year trading range in July and hasn’t regained the lost support. Wheat is in a down trend since making a high in July 2012. Sugar is in a uptrend since August 2015 and live cattle is in downtrend since November 2014.

Live Cattle Futures - 16-Sep-16

 

Relative Strength

Over the past one month period, Technology, utilities and financials sectors have out-performed S&P 500. On closer look, we find that only Technology, utilities and health-care are improving since the beginning of September.

In Conclusion

Next week two important central bank meetings are scheduled, Federal Reserve and Bank of Japan, which are going to keep the markets in the anxious state. It is becoming increasing clear that Fed will not raise rates this time but there still exists room for differing interpretation of its statement and Q&A session. Similarly, Bank of Japan does not have many option, it still could surprise the market.

So in a nutshell, even though indices were up for the week, the uptrend is under pressure and the monetary policy environment remains unclear. Hence, the bulls should be cautiously waiting on the sideline for the uptrend to resume. They should keep calm and the September gyrations will pass.

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