Selling Strength and Buying Weakness
From 1990 to 1997, Kevin Haggerty served as Senior Vice President for Equity Trading at Fidelity Capital Markets, Boston, a division of Fidelity Investments. He was responsible for all U.S. institutional Listed, OTC and Option trading in addition to all major Exchange Floor Executions. For a free trial to Kevin’s Daily Trading Report, please click here.
In the previous commentary on Tuesday (10/28), I said that in addition to the month ending this Friday that 10/28 was also a key time date. It was the 1.618 Fib ratio of the 7/15/08 1200.44 and 9/18/03 1133.50 lows from the SPX. I also stated the obvious, that the market expected the FOMC to cut rates on Wednesday by either a 0.25 or 0.50 point.
The SPX exploded for a historic +10.8% gain on Tuesday, and +5.0% of that gain was in the last 45 minutes of trading. The media offered a number of reasons, one of which – it was a rally in front of the rate cut. However, in a morning email that I passed on to the Trading Service members I indicated that U.S. balanced funds may have to make some of the largest month-end reallocations of assets since the end of 1987.
The volatility and swings in both the bond and equity markets left the U.S. balanced funds of 60% equities and 40% bonds set for a 4.2% rebalancing out of bonds and into equities. Supposedly, the last time the rebalancing hit these levels was in October 1987 during the crash, and in the last four days of the month, the market gained 10% while bonds traded lower.
On Tuesday there was a +10.9% gain in the SPX, and the TLT declined -1.5%, which was the largest one day decline since 9/30/08. Wednesday, the SPY spiked on the 3:10 P.M. bar to an intraday of 97.16 high, and then knifed down to a 92.17 close, so it looked like more hedge fund liquidation.
NYSE volume was 1.62 bill shs, with the volume ratio 53, and breadth +740. The U.S. dollar index declined while gold, energy, materials, and crude oil were the leaders. Friday is month’s end, and there will most likely be more rebalancing but there could also be more hedge fund liquidation and mutual fund redemptions, so day traders must have a fast trigger finger on trades today and tomorrow.
The SPX futures were up about 30 points before the GDP number at 8:30 A.M., which has very little credibility, will get revised 3 times, and you can bet it will be to the downside. If the market makes a significant move into month’s end, some of the index proxies bought below SPX 900 will be sold, and then again if the election next week goes as the Vegas odds makers say it will, especially if it results in a one party control election.
Have a good trading day!
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