Jitters and Critters Keep the Market on Edge

Advertisement

Editor’s note: Serge Berger is filling in for Sam Collins today. Sam should be back on Monday.

On Thursday, stocks displayed plenty of nervousness as today we enter the last trading day for the month and third quarter. During yesterday’s afternoon session, volatility spiked as various concerning headlines around the state of troubled Deutsche Bank AG (USA) (NYSE:DB) made the rounds, which continues to haunt investors and traders alike with pictures from the financial crisis just a few years ago.

What investors despise more than anything is uncertainty, and between the Deutsche Bank headlines, sluggish global economic growth and the upcoming U.S. election, there is plenty to be concerned over.

Jitters: My phone calls with investors and subscribers on Thursday largely focused around these renewed jitters in the banking sector that revolve around the state of Deutsche Bank.

The company’s credit default swap continues to spike and its share price is one fickle candidate as it once again fell on Thursday. The bulls point to a much better capitalized U.S. banking system while the bears point out that Deutsche Bank’s derivatives exposure could set off a domino effect that few investors currently imagine.

For my part, I respect both sides but also see that the too-low volatility environment and tight trading ranges for asset classes do increasingly favor at least somewhat of a corrective move in coming weeks, and Deutsche Bank may be but one of the focal points.

Critters: On Monday the markets enter the spooky month of October which, aside from ghouls and goblins around Halloween, historically speaking has also offered plenty of negative surprises for the stock market. This does not mean that stocks have to fall off a cliff, but a little shake and bake just to wake up investors again is entirely in the cards considering the aforementioned catalyst and seasonal patterns.

But seeing both sides also means respecting the bullish undertone that is still being displayed. One chart that supports the bull thesis is the following ratio chart of the exchange-traded funds of the Russell 2000 as represented by the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) and the S&P 500 as represented by the exchange-traded fund SPDR S&P 500 ETF Trust (NYSEARCA:SPY).

I divided the IWM ETF by the SPY ETF and the result is the below chart, which shows some serious relative strength by the Russell 2000 versus the S&P 500 since the February lows. While this ratio is now coming into some diagonal resistance, the relative strength should persist until it starts breaking down.

iwmvsspy
Click to Enlarge

Small caps leading large caps at the margin is not a bearish sign … quite the contrary. Whether this ratio alone is enough to keep stocks pushing higher I don’t know, but it does at least provide some perspective for the persistent bid.

Looking at the Russell 2000 IWM ETF in absolute terms, i.e. on its own, shows a similarly sturdy up-trend off the February lows as seen on the relative chart above. The yellow 50-day simple moving average is support area number one, followed by the blue 100-day moving average, which held as support during the late-June selloff.

If the 100-day moving average fails, then traders can look to the red 200-day moving average. While the broader stock market has been ‘boring’ of late, the upside is that well-defined areas of support and resistance have formed as a result of the range-bound price action.

iwmdaily
Click to Enlarge

In conclusion: Over the past few weeks I have seen an increasing amount of investor complacency. History suggests that a state of complacency is not a good one to find oneself in coming into the month of October.

As the Russell 2000 chart shows, indices currently have well-defined support. If those support levels snap, respect it and adjust. Don’t make things more complicated than they need to be.

Like what you see? Sign up for our daily Beat the Bell e-letter and get Serge’s investment advice delivered to your inbox every morning! Download Serge’s Free Special Report: 6 Keys for Successful Trading and Investing.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2016/09/jitters-critters-spy-iwm/.

©2024 InvestorPlace Media, LLC