The so-called “turnaround Tuesday” phenomenon — where stocks do the opposite of what they did Monday — was in full force. Stocks gave up a good portion of Monday’s week-opener bounce on the back of the Chinese devaluing the yuan.
The benchmark S&P 500 closed 1% lower, but is still in the middle of its multimonth trading range, holding on to the 200-day simple moving average for dear life.
In the previous Daily Market Outlook, I discussed the tendency for stocks to rally into options expiration day, which falls on Aug. 21 this month. Add to that the seasonal tendency for a mid-month rally, and the odds are good that the market will hold up at least through the end of next week before potentially topping out and rolling into a more volatile September-to-October period.
While the broader market has the potential to melt up in the coming days/weeks, the upside appears to be capped in the all-important banking stocks, which have a tendency to ebb and flow with the steepening and flattening of the yield curve.
In the chart below, I plotted the KBW Nasdaq Bank Index (BKX) in red and the yield curve in blue. The positive correlation is undeniable, as is the current wide spread between the two.
This tells us that banking stocks have some catching up to do on the downside. Also keep in mind that without meaningful participation from the banks, the broader market’s upside is also likely capped through a multiweek lens. In other words, if the S&P 500 were to rise for another couple of weeks, a lack of participation by the banks will act as a brake.
Goldman Sachs Group Inc (GS), while not represented in the BKX index, is still one of the preeminent financial institutions. On Tuesday, it closed below its 100-day moving average (blue line) and below lateral support. This doesn’t preclude another bounce, but it does make the path of least resistance down toward the 200-day moving average (red line) near the $195 mark.
Tuesday’s selling also took iShares NASDAQ Biotechnology Index (ETF) (IBB), which I highlighted on Monday, to its 100-day simple moving average. Support is getting increasingly thin after IBB saw a couple of high-volume down days late last week.
From a cross-asset perspective, note how iShares iBoxx $ High Yid Corp Bond (ETF) (HYG) is doing some serious cliff hanging as the lower end of the bond credit rating spectrum is under pressure.
An eerily similar picture is seen in emerging market stocks as represented by iShares MSCI Emerging Markets Indx (ETF) (EEM). After rejecting the upper end of the multiyear range again in May, EEM has found its way to the very bottom of it. The more often this multiyear line of support gets tested, the more volatile an eventual breakdown will be.
Conclusion
The odds favor a bounce in the broader market into the latter part of August considering the history of a melt-up into options expiration week (next week), as well as a favorable seasonal pattern in the middle part of August. Any such bounce, however, is likely to be capped near the 2,130 to 2,160 area on the S&P 500 while a daily close below 2,065 would open the gates lower.
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.
