It was a record-setting week for major market indexes, with the Dow Jones Industrial Average hitting an all-time high, and the S&P 500 Index taking its first trek ever north of the 2,000 mark . Not wanting to be left out of the party was the tech-heavy Nasdaq Composite, which continued to tag a string of 14-year peaks. Despite a modest mid-week breather amid unsettling developments in Ukraine, all three of these key benchmarks finished the week -- and month -- with gains. In fact, the S&P 500 notched its best August in 14 years, and as Schaeffer's Senior VP of Research Todd Salamone explains, this could have bullish implications heading into a historically bearish September.
Finally, we close with a preview of the major economic and earnings events for the week ahead, plus our featured sector.
Notes from the Trading Desk: What We're Watching in September
By Todd Salamone, Senior VP of Research
"... the S&P 500 Index (SPX – 1,988.40) peaked at 1,994.76, logging another all-time high. Not only was this just shy of the critical 2,000 millennium level, which also marks an exact tripling of the March 2009 low of 666.79, but the only other time the SPX had to deal with a round millennium level was roughly 17 years ago -- and, like today, investors were focused on overseas news ... The good news, if you are a bull, is that the SPX managed to slice right through the 1,000 level when it touched this level for the first time in early 1998. It went on to rally another 15% by July 1998, before ultimately revisiting 1,000 the following month ..."
-Monday Morning Outlook, Aug. 23, 2014
$SPY call wall 200-strike in 8/29 series... $SPY has stalled at 200 intraday after a.m. gap below. Pin coming?
-@ToddSalamone on Twitter, Aug. 28 2014
"U.S. stock-market volume averaged 5.3 billion contracts a day in August, compared with a mean of 6.3 billion in the first seven months, data compiled by Bloomberg show. Depressed trading could be a sign that investors are losing interest in a bull market that's seen the value of the S&P 500 almost triple since 2009..."
-Bloomberg, Aug. 29, 2014
On the heels of discussing the S&P 500 Index (SPX - 2,003.37) and the 2,000 millennium level last weekend, the index gapped higher to this area on Monday morning, with a 2,000 print in the first hour of trading. But, unlike 1998, when the SPX sliced right through the 1,000 level after visiting that millennium for the first time, the SPX traded sideways for the rest of the week.
One thing present now, but not present then, is weekly options, as options that expired on Friday, Aug. 29, apparently contributed to the lackluster movement following Monday's gap. For example, note the open interest configuration graph immediately below that portrays Aug. 29 expiry on SPDR S&P 500 ETF Trust (SPY - 200.71) options. The "call wall" at the 200 strike is extremely noticeable, and roughly equates to SPX 2,000. A Friday SPY close around 200 would be a dream for sellers of option premium, who pocket the premium from worthless out-of-the-money put options (put strikes below the market) and call options that expire worthless or near worthless at expiration. With extremely low volume in the week ahead of Labor Day weekend, there may have been attempts to keep the SPY at or near 200 into Friday's expiration.
For perspective on last week's low volume, the SPY average five-day volume was only 58.6 million, 33% below the 100-day average volume of 89 million. Moreover, the lowest trading volume of the year occurred on Wednesday. And, for additional perspective on the call open interest at the 200 strike that expired on Friday, peak call open interest on SPY options expiring on the Friday before Labor Day weekend last year was just over 50,000, compared to more than 100,000 contracts this past week.
In looking ahead to next week, there won't be as big of an incentive to attempt to "pin" the SPY around the 200 strike, with call and put open interest combined only totaling about 50,000 contracts. Plus, volume is likely to pick up after the Labor Day weekend. Therefore, we are more likely to see directional movement, unlike the flattish movement that occurred after the first hour of trading last Monday.
From a bigger-picture standpoint, next week we move into the month of September. If you haven't already heard discussion around September being historically the weakest month of the year, this is a topic that bears will likely bring to your attention. Indeed, over the past 50 years, the SPX has experienced negative returns, particularly following a positive August month, which we just experienced. But, over the past 13 years, 57% of Septembers have been positive, versus only 50% in the previous 50 years. And, during the past 13 years, September has been more likely to be positive following a rally in August. When September is a losing month, it is the average loss that stands out. So, if you want to protect against such losses, a hedge might be worthwhile.
Turning to levels, round numbers and year-to-date breakeven points continue to come into play on various equity benchmarks. Hesitations or key pivots around these levels have been a recurring theme in 2014. We found it interesting, for example, that after the Russell 2000 Index (RUT - 1,174.35) finally climbed back above last year's close of 1,163.64, after two separate failures to retake this level since late July, this area proved to be supportive on Thursday morning's gap lower. In addition to the SPX doing battle with the 2,000 level, the PowerShares QQQ Trust (QQQ - 99.78) has gone flat during the past week, just below the round $100 century mark. Moreover, the NYSE Composite (NYA - 11,046.35) continues to do battle with 11,000, after first touching this millennium mark in June. Clearly, the momentum off the early August bottom has slowed as various round numbers are tested.
Even with multiple benchmarks battling round-number areas, we still like the market's prospects, as the unwind of extreme pessimism from early August still appears supportive. For example, equity option buyers are not nearly as negative as they were in early August. But then again, they are still not showing the optimism that was prevalent ahead of the July peak, suggesting there is still a fair amount of short-term traders that could bid stocks higher.
According to this past week's National Association of Active Investment Managers (NAAIM) survey, active investment managers who reduced exposure just ahead of the early August bottom, jumped back into the market. But, the group's long exposure is still below extremes that have typically preceded a loss of momentum or a decline (see first chart below). This would suggest that this group still has cash on hand, or short exposure, that represents future buying power.
Speaking of short interest, SPX component short interest remains at range highs, even though there was covering activity in the latest report. In fact, total short interest is nearly 6% above the June 2014 low, which preceded a build in short interest that contributed to a loss in momentum and an eventual modest decline (see second chart below).
In the coming days, there may be a wait-and-see game for short-term players to deploy more cash to the market, or for the shorts to throw in the towel. The "wait" might be related to how multiple benchmarks, such as the QQQ and SPX behave around their respective round-number levels, especially as we enter a historically weak month.
If the SPX makes a clear move above 2,000, the next potential hesitation point is the 2,030 area, with its 10% year-to-date gain at 2,033, and the tripling of the 2009 closing low at 2,029. The tripling of the 2009 intraday low, as mentioned last week, is at 2,000.37.
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