It was an uneventful start to the week. Traders understandably weren’t looking to take on much risk ahead of this week’s big economic data points and some participants were absent due to the Jewish holiday of Rosh Hashanah.
We will see an avalanche of economic data this week. This includes:
- Empire State Manufacturing Survey — Tuesday at 8:30 a.m. EST
- Consumer Price Index — Wednesday at 8:30 a.m. EST
- Housing Market Index — Wednesday at 10 a.m. EST
- FOMC Meeting Announcement — Thursday at 2 p.m. EST
- Quadruple Witching Options Expiration — Friday
The biggie for the week, of course, will be Thursday’s long-awaited FOMC interest rate announcement. Fed fund futures are currently pricing in about a 30% chance of a rate hike.
To yours truly, however, and through the lens of risk management, traders and active investors would be wise to assume a 50% chance of a rate hike. In other words, they should not bet on a certain outcome as better trading opportunities will most likely set up in the days after Thursday’s decision.
Since the range expansion in the S&P 500 — i.e., the drop off the cliff in the second half of August — the daily trading ranges as measured by the average true range have also dramatically widened. Yet, they have begun to tighten again lately, and that sets the index up for the next directional move.
Immediately following the FOMC statement, stocks could do just about anything. A rally up to the medium-term moving averages shown in the chart below cannot be ruled out. Ultimately, though, and given the structural damage done on the charts in August, a retest of the August lows looks likely — at the very least.
The important sectors of the S&P 500 are now trading below broken support lines, meaning there is significant overhead resistance. Therefore, a V-shaped recovery like investors have become accustomed to in recent years looks less likely.
I think there is a higher probability of a W-shaped bottom into October/November, where active investors could once again find better odds of playing the stock market from the long side for more than a trade.
The VIX, with its late-August spike to 53, has likely already peaked in this volatility cycle. When the VIX smashes above the 40 area, V-shaped reversals in price don’t typically occur. In that case, what is needed for a better bottoming process is divergence between price and volatility where the VIX makes a series of lower highs but the S&P 500 retests the recent lows or even undercuts them.
The small-cap Russell 2000 is still holding its 2009 support line, as well as its 125-week simple moving average (red line). Ultimately, these lines could snap heading into October, but for the time being, traders would be wise to respect them as support.
Conclusion
Given Thursday’s juggernaut interest rate decision, this week is not a time to press any bets. Instead it is a week for risk management, observation and circling spots to get more active in again next week. Also remember that Friday’s quadruple witching options expiration makes for a lousy day to initiate new major bets.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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As of this writing, Serge did not hold a position in any of the aforementioned securities.
