There is a scene in Shakespeare’s play, Julius Caesar, where Caesar, while walking to the Senate and his eventual assassination, is warned by a soothsayer in the street: “Beware the Ides of March.” Caesar is uneasy, but ignores the warning – and is unexpectedly ambushed.
It feels like something similar is happening to the stock markets. Traders are uneasy.
The sharp decline in the S&P 500 index (SPX) on Friday (Sept. 12) and the further decline over the weekend looked like everybody suddenly deciding they didn’t want to hold any positions. But they are not so uneasy they will turn back.
We are not worried enough. Nobody is quite ready to leave the party. And this complacency increases the sense that there is some sort of ambush lurking around the corner.
The Ides of September – in the Roman calendar roughly the middle of the month – maybe the time when we find out. Consider what is going on this week:
• The Scottish referendum on independence;
• the Fed Open Market Committee meeting and press conference;
• Triple witching hour
Toss in the VIX options expiring Tuesday, not one but two low-intensity wars and – for those who place their faith in the movement of the stars – the approach of the fall equinox. There is a potential witch’s brew that could easily end in toil and trouble.
What To Watch For
FOMC: In past statements the Fed talked about “significant under-utilization” of labor and tied it to low interest rates continuing for “a considerable time.” If either of those phrases disappears from the September 17 statement it will be seen as hinting at changes in interest rates. The market will react violently.
Scottish Referendum: If the vote is No the market will react violently up; if the vote is Yes, the market will react even more violently in the opposite direction. This is too close to call, but our guess is a No vote. We’ll know September 18.
Triple witching hour: This is the simultaneous expiration of index futures contracts, index options and stock options on September 19. Big money depends on where the settlement price is fixed, and there will be determined attempts to move the market up or down. As a result … yeah, the market will react violently.
Short Term Outlook
For short-term traders like us, this might be a good week stay home. But there are some technical levels we will be watching:
On the SPX, we’ll have an eye on 1991 and 1971. 1991 is the break-out point of the V-shaped pattern (see chart) and subsequently a support line. The support was broken on Friday and precipitated selling. If the market climbs back above that level and stays there, we could easily move back up to 2000 or higher.
The 1971 point is the Fibonacci retracement and a major support level. If it fails to hold, we expect a further decline, with an initial target around 1950; the ultimate short-term target is the August low at 1905.
But don’t fall in love with the short side. This pullback has spooked lots of traders; but it is still a relatively minor bump in the road up. Watch to see if the support levels hold up this week. And don’t declare this a former bull just yet.
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SPX Daily Chart – Sept. 12, 2014
