U.S. stocks sprinted higher last week to close the month of August on a strong note. Fund manager performance chasing or not, last week’s price action has left behind on the weekly charts yet another string of long tails as the bulls simply played better offense than the bears played defense. As such and in my eye, this remains a market that does not favor the bears, yet the seasonal increase in volatility in the months of September and October also remains a very real risk for traders and investors alike.
From a tactical positioning perspective, for the past few weeks I have reiterated to my subscriber clients and students that while this is no environment just yet to sell down all stock holdings and run for cover, taking into consideration an aging cyclical bull market, rising geopolitical tensions globally and the potential for a seasonal volatility increase, a somewhat defensive posturing does make sense. Whether one accomplishes this by taking some profits in intermediate-to-longer-term stock holdings or simply buying portfolio protection by way of something as simple as index put options in the end does not matter.
Remember, every battle is won before it is ever fought.
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
Looking at the multiyear weekly chart of the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), we note that the up-trends remain firmly intact but that the latest leg higher since the spring has come on so called “negative divergence,” where price is pushing higher but momentum as in this case represented by the MACD momentum oscillator at the bottom of the chart is making lower highs.
Looking at the Bond Market
Moving averages legend: red – 200-day, blue – 100-day, yellow – 50-day
Away from the stock market for a minute, over in the bond market on the longer end of the yield curve as represented by the iShares Barclays 20+ Yr Treas.Bond (ETF) (NASDAQ:TLT), we see that bond prices have slowly risen, i.e. bond yields have fallen.
While this is causing plenty of confusion among macro analysts and fund managers given that a prevailing view earlier in the year was that inflation was increasing, my focus here is on staying out of bond-sensitive instruments.
The going in bonds has been extraordinarily choppy year-to-date, and because choppy markets are one of the easiest ways to lose money, particularly when surrounded by lots of noise as the current bond market is, I still think that staying away from bonds and bond-related instruments from an active management perspective is the way to go for now.
Moving averages legend: red – 200-day, blue – 100-day, yellow – 50-day
One thing that has worked all year in the stock market (as it usually does) is continued sector and group rotation — although this too has slowed down in recent months and weeks.
Thanks to a rally in large-cap pharmaceutical stocks last, week my proprietary trend algorithm scanner once again tagged the healthcare sector as represented by the Health Care SPDR (ETF) (NYSEARCA:XLV) as near-term bullish.
In the upper part of the chart, note how the XLV ETF has been in consolidation mode for the past few months following a breakout past important horizontal resistance in the first half of June. This breakout point has now been retested and the XLV last week promptly rallied to fresh year-to-date highs.
At the bottom of the chart I divided the XLV ETF by the SPY ETF, and the blue ratio chart shows an increasing giddiness of healthcare to outperform the S&P 500.
Conclusion
In summary, although many of the broader stock indices managed to recover last week as fund managers played the performance-chasing game into month end, the September and October period has a strong tendency to see a spike in volatility and at least a few percentage points of downward pressure in the broader stock indices.
As such, snapping up some portfolio protection either via puts in the broader stock indices or taking some profits seems like a reasonable move at this juncture. Trading opportunities however will provide themselves in both directions.
Check out Serge’s Trade of the Day for Sept. 5.
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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