After last Friday’s worse-than-expected September jobs report, which did not materially move financial markets, things could get more interesting this week. Between another round of Fed speakers, the Fed minutes on Wednesday, and most importantly the start of third-quarter corporate earnings season, there will be plenty for you to chew on.
Market participants thrive when volatility picks up. While there’s always something to do if you’re willing to look close enough, the reality is that roughly 80% of stocks tend to move up and down together. So when a major index like the S&P 500 — as represented by the popular SPDR S&P 500 ETF Trust (NYSEARCA:SPY) — is in snooze mode as it has been for much of the past 12 weeks, the majority of stocks in the index are also chopping back and forth in a trendless manner.
To my clients and subscribers, I reiterate on a daily basis that over-trading is an epidemic among most active market participants. Moreover, this behavior is a major contributor to lousy trading/investing performance. Over-trading contributes to account draw-downs during choppy sideways markets like the one we’re in now.
How can you avoid it? Simple: Keep perspective, and respect the trendless market until something changes.
SPY ETF Charts
Looking at the SPY ETF using weekly bars on the first chart below, we see that the January/February double-bottom was followed in late June by an impressive higher low. The early July breakout to fresh all-time highs, however, has seen no follow-through and kept the index range-bound ever since. Yes, there have been pockets of stocks that under or out-performed the broader S&P 500, but largely speaking, the sideways trend remains.
Like all things, this sideways chop will ultimately come to an end. And if history is any guidance, the longer the sideways range persists, the more violent a breakout ultimately will be.
The SPY’s sideways range since early July has roughly equated to about a 3% range. If that sounds narrow, that’s because it is. Particularly over a 12-week stretch.
If we look closer, we see that the range has essentially taken place in three clusters, which I marked with the blue boxes. These three boxes are:
- The early July breakout.
- A rally day on Aug. 5.
- A one-day selling spree on Sept. 9.
Aside from those three points, the SPY ETF has essentially not moved since early July.
Yes, the SPY ultimately will break in one direction or another, but instead of speculating when this will take place, let me highlight the next three support areas for the index.
If and when the SPY breaks out of the current range to the downside (i.e., below $212.50), then support area No. 1 becomes $209, followed by support area No. 2 near $206.50, and finally support area No. 3 near the June lows of $199 – $200.
Respect the sideways chop until it ends or risk falling into the trap of over-trading.
Patience is a virtue, both in the markets and in life in general.
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