Market Overview

Stocks nervous over quarterly rebalancing, Congress, crude


By Danny Riley


While the S&P is still in an uptrend, there is also a high level of nervousness surrounding the major indices as we go into the September quarterly rebalancing, because of a potential government shutdown, crude oil price fluctuations, and October. The Asian markets closed mostly lower and Europe is trading is mixed to lower. Today starts with 3 separate economic releases, the crude inventory numbers (API) and a 5-year note auction. After yesterday’s late-day sell-off and $800 million for sale on the cash close, it appearsT+3 has already begun.


Quarterly rebalancing is not necessarily bearish

ES 12-13 (60 Min)  9_25_2013

Yesterday’s retest of Monday’s 1702 high at 1701 and the late-day rejection was a stunning turnaround. The 1701 rejection and the overall negative late-day price action seems to indicate the current decline may not be over. That said, the S&P futures have now closed down 4 days in a row: Sept. 19 (-.40), Sept. 20 (-15.0), Sept. 23 (-9.7), Sept. 24 (-.20), for a total loss of 25.3 handles.

It’s important to remember that while it may be “big to sell” at the end of the quarter, the mutual and investment funds will also be trying to mark up their winning positions. With an extended selloff going on and 4 full trading days left in the quarter, we do not think it will be all downside. If the S&P does sell off again, we would be more concerned about a bounce than a sharp drop.

Our view

There is a high level of anxiety floating about in the markets and most of it seems to be centered between crude oil and the S&P. The shorts covered on the push to a new high, but from what we see they are putting them back out again — they are selling. The question is, can the S&P keep going down until the end of the month? Can the S&P close down 5 or even 6 days in a row or even into the end of the quarter?

We don’t think so and we believe there will be two-way price action going on right into the end of the quarter. We expect lower prices in the first part of the day but we don’t think the S&P will go down much. We lean to selling the early rally and buying weakness.

Stock Trader’s Almanac and Octoberphobia

October has a dreadful history of market crashes such as in 1929, 1987, the 554-point drop on October 27, 1997, back-to-back massacres in 1978 and 1979, Friday the 13th in 1989 and the 733-point drop on October 15, 2008. During the week ending October 10, 2008, the Dow lost 1,874.19 points (18.2%), the worst weekly decline in our database going back to 1901, in point and percentage terms. It is no wonder that the term “Octoberphobia” has been used to describe the phenomenon of major market drops occurring during the month.

So far all the hoopla about the Fed taper, Syria, the German election, ECB, and interest rates has failed to provide the big selloff. Sure the S&P sold off 80 handles from its old contract high of 1705, but the S&P has persevered. The next set of obstacles are now in view: the budget, the end of the 3rd quarter, and the historically troubled October. From a street guy’s point of view it’s important to look back at all the past negatives as the S&P continues to turn bad news into good.

As always, keep an eye on the 10-handle rule and please use stops when trading futures and options.

  • In Asia, 8 of 11 markets closed lower: Shanghai Comp. +0.13%, Hang Seng -0.32%, Nikkei +0.76%.
  • In Europe, 7 out of 12 markets quoted are trading higher or unchanged: DAX -0.26%, FTSE -0.36%.
  • Morning headline: Stocks nervous but not bearish over quarterly rebalancing, Congress, crude
  • Total volume: 1.5mil ESZ and 5.7k SPZ traded
  • Economic calendar: MBA purchase applications, durable goods, new home sales, the API and a 5-year note auction
  • MrTopStep Closing Print Video
  • E-mini S&P (Sep)1723.89+2.50 - +0.14%
  • Crude103.53+0.40 - +0.39%
  • Shanghai Composite2198.515-9.016 - -0.41%
  • Hang Seng23209.631+30.592 - +0.13%
  • Nikkei 22514620.53-112.08 - -0.76%
  • DAX8648.59-16.01 - -0.18%
  • FTSE 1006539.66-31.80 - -0.48%
  • Euro1.3501
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The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Trading Ideas


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