Weekly Market Summary

SPX reached the top of a 5-month rising channel in early September (blue line) and then successfully retested the breakout above its January high (top red line). So far, there's no foul. But a return to 2870 likely leads to a break lower, to the 50-d, the bottom of the rising channel or to 2800 (bottom red line). There is plenty of support and the worst of these outcomes represents a total decline of just 4%.



SPX ended last week on a 5 day in a row winning streak. The last 18 such winning streaks all led to at least one higher close within the next 5 days, so further gains sometime this week should be expected. Moreover, September options expiration is on Friday and the week has a mild bullish inclination (from Quantifiable Edges; click for the full article).



But there remain a number of short term watch outs.

First, the week after September options expiration is the "weakest week" of the year. In the 27 years since 1990, SPX has traded down through Thursday a remarkable 82% of the time (from Quantifiable Edges; click for the full article).

Historically, the end of September and into October is a weak period for US equities. That typically sets up a rally into the elections in early November (from (from Sentimentrader; to become a subscriber, please use this link).



Second, the FOMC meets a week from Wednesday and the odds of a rate hike are over 90%. There have been 7 rate hikes since 2015 and all but one has coincided with a downdraft in US equities. The one exception came last December when the large tax reform package was approved.



Third, market breadth has split: while some stocks are hitting new highs, many others are hitting new lows. When this happens every day for a week or more, the SPX has almost always traded lower over the next month: since 1970, all 13 instances have preceded losses (from Quantifiable Edges; click for the full article).

Finally, the equity-only put/call ratio continues to drop, showing a rise in short-term investor complacency. The one-month average is at the same level as in mid-June, before a 3% fall in SPX. This signal can be early (as in December 2017); most of the failures have occurred after notable lows in SPX (e.g., mid-2010, early 2017). It would easier to look past this indicator if the others mentioned above were not also present.



It seems unlikely that any equity weakness will be substantial or long lived, but investors should remain on alert to heightened risk over the next several weeks. We believe that will be a good set up for gains into year end.

IBD Investors

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