Why Late August Is Significant
The September S&P 500
futures (SPU and ESU) managed to finish slightly higher in a second week
of outperformance by the tech sector, specifically the chip stocks. While the
Dow was also able to post a new closing high, its performance was overshadowed
by the continued relative weakness of the broader S&P 500. Much of the weakness
stemmed from a very poor showing by financial shares, which are the
heaviest-weighted sector in the index. There really hasn’t been any hard news
to explain the broad-based selling in the sector, however, rumors continue to
circulate that several large institutions were caught with their pants down
after the bond market’s recent decline.
The September S&P 500 futures closed Friday’s
session with a loss of -9.50 points, but were able to squeak out a gain for the
week of +2.00 points. Volume in the September ES was estimated at 578,000
contracts, which was just off Thursday’s pace but decent for a summer Friday.
Last week marked the third attempt to break out of a 2-month trading range. After
struggling with 1,000 for 4 days, the futures rallied hard on good news from
Intel (this time it’s really different!) on Friday morning, but turned into a
huge “gap and trap.” On a daily basis, the contract reversed off Thursday’s
gravestone and posted a bearish engulfing candle as well as a “key outside
reversal day.” The contract closed below the prior three days’ lows, settling on
its 10-day MA and its previously broken downtrend line (see chart).
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Normally,
reversal days like Friday are a strong indication that a short-term top is in,
but a lower close on Monday is needed to confirm it. On an intraday basis the
ES cracked its 60-min trendline in fine fashion and the 1-min 3-Line Break chart
closed with a short bias and a Break Price of 993.50. The VIX reversed off of
Thursday’s inverted hammer and closed back above its 10-day MA and the 20 mark.
What does this all mean? What it boils down to is that this market is long
overdue for a healthy correction (key word there is healthy) and has the room to
even pull back to the 902 area (a 50% retracement of the March low to June high)
while still maintaining its longer-term bullishness.
Looking ahead this week, the last week of August
is often noted as being one of the slowest of the year, however, we do have some
key economic reports starting with Tuesday’s Durable Goods and Consumer
Confidence reports. Also, with Friday’s key reversal, market conditions could
become a rollercoaster ride. The 2 critical sectors
to keep an eye on are the techs
and the financials since all last week, the S&P 500 was in the middle of a
tug-of-war between the techs and the financials. On Friday, most technology
shares finished to the downside, despite the very strong open on the Intel
news. Meanwhile, most financial shares closed at their lows for the week. In
addition, many bellwether financial stocks that make up the Banking Index (BKX),
such as C and JPM, have put in almost textbook head and shoulders tops, and are
now sitting just above the necklines (see chart). With that said, even though
the last week of August is usually a slow time period for the markets, this year
could be different. On a trivial note, the major indexes have all put in
intermediate-term tops in late August for the past 5 years, and I wouldn’t be
surprised if 2003 marks the 6th year in a row.
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