Tuesday, September 30, 2014

S&P 500 Index - Room to Disappoint...for a time

We last looked at the S&P 500 Index Emini on September 25th suggesting that month end buying would be insufficient to lift prices.  While price action has been more volatile of late, there has been a greater tendency to find lower levels and an increasing inability to recover lost ground with any significance.  As such, we are compelled to expect still further price weakness until such time as some level of oversold conditions prevails. 

Tuesday marked the third session where prices were unable to recapture the ‘mid’ of last Thursday’s 29.25 point open to close decline.  Importantly, Friday’s close was only a hair shy of the settlement needed.  Since, ESZ (December Emini S&P 500 Index) has come gradually lower, giving back intra-session gains on Tuesday. 

Tomorrow is the first day of the ‘scariest’ month of the year and many market watchers will tell us the meaning of an up day or a down day for October 1 and how many time since 1900 such events led to a bullish or bear month.  Right now, a month seems like a long time away and so I would concentrate on immediate prospects which appear to indicate still lower prices forthcoming. 

As an aside, my sense is that a great majority is joined to the notion that economic prospects in the U.S. have improved enough to allow for a strengthening dollar to positively impact the prospects for Europe and Japan, thus enjoying a shared benefit from U.S. strength.  Conditions are in place for continued 2.25% or better domestic U.S. real GDP growth over the coming quarters.  However, a bit more than that level of growth is currently priced.  The U.S. economy may not be able to share her strengths to the extent believed and any collection of negative economic surprise will quickly derail expectations for early-year 2015 Fed rate hikes. 

Friday would be a perfect time for an economic report to show weaker than expected.  It would give the Fed the leeway to continue to profess intent to wait a ‘considerable time’ following the end of the purchase program before raising rates.  This would benefit longer rates and provide further and arguably still needed support.  There should be fewer squabbles by Dallas Fed Fisher and Philly Fed Plosser if a consecutive employment report disappoints, leaving behind a half-year period of +200K non-farm payroll results.  

To the extent the strength in domestic equities has been attributable to greater economic prospects, a jarring report of lower employment growth on consecutive months could prompt some further equity selling against repositioning (asset allocation to) in fixed income.    

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